The United States federal government issues bonds to finance the ongoing operation of government services, to pay interest on existing debt and to undergo new projects. Taken as a whole, investors oftentimes refer to bonds issued by the U.S. federal government simply as "Treasuries." However, government bonds have a number of features that distinguish one type from another, and grouping them all together can be misleading.
When you buy government bonds, you are, in essence, lending your money to the federal government. In the United States, the creditworthiness of the Treasury is backed by the government's full taxing powers. In other words, the mandated income taxes paid by citizens, as well as the numerous additional charges levied on business and commerce, work as collateral in ensuring the repayment of government bonds. Since, the federal government is thought to have unlimited taxing powers, U.S. bonds carry little to no risk of default.
Short-term debt securities issued by the federal government are called U.S. Treasury bills. Time to maturity varies from one to five years among separate issued Treasury bills. Intermediate-term bonds, also called U.S. Treasury notes, carry time to maturity terms ranging from six to 12 years. Long-term government bonds have maturities of more than 12 years, and generally run up to 30 years.
Because of low-to-no risk associated with government bonds, investors interested in this type of investment are readily available. A large viable bond market exists in the United States and U.S. Treasury debt issues are popular among investors in many foreign countries. Therefore, because government bonds can be quickly converted to cash, via a sale, there are said to be liquid investments.
Interest rates earned on government bonds parallel the specific types of bonds. On bills, notes and bonds, generally the interest rate earned increases in direct proportion to the length to maturity. For example, short-term issues like Treasury bills yield lower earnings than notes, with long-term bonds earning the highest rates among the trio.
The features of U.S. savings bonds, such as the popular Series E and Series I bonds, should be considered separately from Treasuries as these types of government bonds are intended to be long-term investments purchased by the average consumer. Savings bonds can be redeemed for the full face value upon maturity. Generally, except in the case of a natural disaster, owners of U.S. savings bonds are required to hold the bonds for at least 12 months. If redeemed in initial five years after issuance, an early-redemption penalty equaling three months interest is imposed.
- USA.gov; Government Securities and Investments for Sale; March 2011
- Treasury Direct; Treasury Bonds In Depth; April 2009
- Treasury Direct; Treasury Bonds: Rates & Terms; May 2010
- Treasury Direct; Using Your Income Tax Refund to Save By Buying Series I U.S. Savings Bonds; January 2011
- Ennis Knupp. "Introduction to Fixed Income Derivatives." Accessed August 24, 2020.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.