Buy a government IOU.
That means, unlike corporate bonds issued by companies, there is virtually no chance that the government will default on paying you your interest when it's due. But because Treasuries and savings bonds are affected by interest rate changes, the prices and yields may fluctuate before you cash them in.
Here's how they work. Treasury bills are short-term securities with maturities of one year or less. Three- and six-month Treasury bills are the most common securities bought by investors. Offered in minimum denominations of $10,000, T-bills are issued at a discount from their face value. That is, when you buy the bill, you pay the face value minus the interest. When the bill matures, you collect the full face value.
Suppose the one-year T-bill rate for the week is 7%. You would pay $9,300 for a $10,000 bill (for bonds of a lesser maturity, the rate would be adjusted). When the bill matures, you collect a check from the Treasury in the amount of $10,000. The 7% is called your discount rate. The advantage over a corporate bond is that you only had to ante up $9,300 instead of $10,000. You also get government assurance while you're waiting for payment.
The government auctions 91-day and 182-day T-bills weekly. This is significant because most of your variable rate loans, mortgages and money market accounts are tied to the going rate of T-bills. Institutional investors bid for bills at these auctions. Bills are sold to individual investors at the average price of the winning bids.
Treasury notes are debt securities with maturities from one to 10 years, and they are issued in minimum denominations of $1,000. Treasury bonds are issued with maturities from 10 to 30 years.
Confused? Don't be. Maybe U.S. savings bonds are more to your liking. Savings bonds are the little cousins to Treasuries, and they work similarly. There are two kinds, the Series EE and the Series HH. The Series EE bond is an appreciation-type security that accrues interest for 30 years. The purchase price is half of the bond's face amount. For example, a $100 bond costs $50. These bonds are available in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $100,000.
Series EE bonds before March 1, 1995, are guaranteed to pay a minimum interest rate of 4%. Bonds purchased afterwards will float at a rate equal to 85% of the average yield on the six-month T-bill. The interest rate is compounded twice a year. For Series EE savings bonds held five years or more, the interest rate will vary based on the then-current yield on the five-year Treasury note.
Series EE bonds are favored by parents who are saving for a child's college education, but there are pitfalls.
Buying bonds in your child's name could reduce your chances for college financial aid. Most colleges count 35% of a child's assets as available to meet college costs, but only 5% of parents' assets. This means that $10,000 in a child's name will count as $3,500 available for college expenses, but in the parents' account it would be only $500.
When Series HH bonds are issued, the rate is fixed and can be reset every 10 years. Bonds are current-income securities that cost the face value of the bond. Series HH bonds are available in denominations of $500, $1,000, $5,000 and $10,000, and they earn interest for 20 years.
These instruments all share one advantage: They are free of state and local taxes. You will pay federal taxes under capital gains. However, your liability is deferred until the bonds mature.
You can buy Treasuries through your broker or your bank, but the transaction fee you have to pay will eat away at your final profit. The most inexpensive way to buy Treasuries is to go directly to the Federal Reserve bank in your area. You can get details on how and when to buy by writing to: Bureau of the Public Debt, Parkersburg, WV 26106-1328. For current recorded rate information, call 800-487-2663.
Savings bonds are available from the Federal Reserve or a bank. You can also get them through your human resources department.
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|Title Annotation:||investing in U.S. Treasury securities|
|Date:||Jun 1, 1995|
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