Bills, Notes, Bonds, TIPS: U.S. Government Securities

Chart of the Week for May 6-12, 2005

The U.S. Treasury Department recently notified the public that it might issue 30-year Treasury bonds in the near future. In the event these securities are offered to the public, many fixed income investment managers will add these securities to the fixed income portfolios they manage. Given that most deferred compensation plans offer fixed income investment options, an explanation of the differences between the major types of securities issued by the U.S. government may be in order.

The U.S. Treasury issues Treasury bills, notes, bonds, and Treasury Inflation Protected Securities (TIPS). These securities are sold by the U.S. government in order to pay off maturing debt and raise the cash needed to run the federal government. When you buy one of these securities, you are lending your money to the U.S. government.

The following is a general overview of the major securities issued by the U.S. government:

• Treasury bills are short-term obligations issued with a term of one year or less. Treasury bills are sold at a discount from face value and don’t pay interest before maturity. The interest is the difference between the purchase price of the bill and the amount that is paid to you either at maturity (this amount is the face value) or when you sell the bill prior to maturity.
• Treasury notes and bonds bear a stated interest rate, and the owner receives semi-annual interest payments. Treasury notes have a term of more than one year, but not more than 10 years. Treasury bonds are long-term obligations with a term of more than 10 years.
• TIPS, or Treasury Inflation-Protected Securities, are securities whose principal is tied to the inflation rate. TIPS bear a stated interest rate, and the owner receives semi-annual interest payments. The Treasury issues TIPS in terms of 5, 10, and 20-year maturities.

To learn more about the securities issued by the U.S. government, visit the Financial Management Services Web Site at www.fms.treas.gov.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

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