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Treasury bond definition

Treasury bond meaning

Treasury bonds (known as T-bonds for short) are released by the US government so they can raise money for day-to-day spending or major projects.

These are long-term investments that can last anywhere between 10 and 30 years. Interest is paid to investors twice a year, and they are considered risk free because there is little to no chance of the US government defaulting on repayments. As a result, the interest offered by T-bonds tends to be quite low.

How they work

When the government is issuing new bonds, they will normally be sold through an auction. Each Treasury bond has a face value of at least $1,000. The coupon rate attached to the bond dictates the percentage of interest that will be paid per year, while the maturity date specifies when the face value of the bond will be returned in full.

Bonds can be sold between investors, and it is common for prices to fluctuate on these secondary markets, meaning that a $1,000 bond issued in 2001 could end up selling for more (or less) than its face value. This is usually determined by whether the coupon rates of newer bonds are better or worse in comparison. If the 2001 bond offers higher annual payouts than a 2019 bond, they will be worth more than $1,000. Should the payouts be lower, their value will depreciate.

Another thing that investors need to take into account is inflation. While $1,000 may have been a sizeable sum of money in 2001, price rises may mean that it doesn’t have the same purchasing power in a few decades’ time. As a result, inflation can eat into the modest returns made through Treasury bonds.

These fixed-income instruments are also used by other governments around the world, but bonds issued by these countries can be riskier if they have a poor credit rating.

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