A Treasury bond is simply a long-term security issued by the
US Treasury that features a 30-year, fixed maturity and requires a minimum
investment of $100. Treasury bonds belong under the umbrella of US Treasury
securities, which include:
·
T-bonds
·
US Treasury notes
·
Treasury securities
·
Government bonds
The Department of the Treasury gives these securities to
raise money that the federal government uses to run its operations.
Advantages of Treasury Bonds
Putting your money into Treasury Bonds gives you a lot of
benefits. Aside from having no maintenance fees, Treasury bonds also feature:
·
Guaranteed rate of return
·
No value loss
·
Tax exemptions
·
Good for retirement
Tax Benefits
Both the state and federal bonds offer potential tax
savings. The interest on federal bonds is exempt from state and local taxes. Municipal
bonds, on the other hand, are usually not subject federal taxes and, in some
cases, they are also exempted from state and local income taxes as well.
On the other hand, some municipal bonds may be taxed if you’re
hit with the alternative minimum tax, so you should check your municipal bond
would be affected before you buy.
Security
Federal bonds are supported by the US government, which is
almost certainly one of the safest investments out there. Also, many municipal
bonds are insured so that even if the municipality defaults, your principal and
interests are safe.
Other investments like stocks or corporate bonds do not have
the same level of security. If the company goes bankrupt, you could lose all of
your investments.
Liquidity
Government bonds can be bought and sold just like many other
investments, like stocks and corporate bonds. For instance, if the bond won’t
mature for another five years but you need cash now, you can sell the bond to
another investor and get your money back.
On the other hand, because of the changing market
conditions, you could find yourself taking a loss to unload the bond. Meanwhile,
based on the situations, you might also be able to make a gain.
Fixed Rates
When you have fixed rate on your government bonds, you are
allowed to budget how much income you’ll have to spend as you receive payments.
Also, if interest rates fall, your rate is locked in so you earn a higher rate
than the market is paying.
There’s also always the possibility that interest rates could
go up. If such things happen, having a fixed rate would be bad news because you’re
stuck with the lower rate.
Read further: Bonds 101: Benefits and Risks Your Should Know
Disadvantages of Treasury Bonds
Some of the disadvantages include:
·
Long-term
investment – you might have to wait up to 30 years before the bond matures.
·
Restrictions
and penalties – restrictions and penalties might be associated with
redeeming T-bonds before they mature.
·
Tax
liability – although you don’t have to pay state or local taxes on the
interest your bond generate, the interest is under to federal income tax.
·
Buying limits
– if you buy your bonds through an auction, you can buy up to 35 percent of
the initial offering amount.
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