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Term Government Bond

Investing for our futures is something that is on our minds continually. Which option will be best to provide financial stability for the future? Government bonds are often thought of as the safest option being that they receive the backing of The US Government. However the bond holder must pay careful attention to the government bond term or they can loose money in the long run.

The longest term government bond is 30 years. This means that in 30 years the bond will be fully matured and the holder can cash it in for the full value. The problem lies with the interest rate. The risk on government bonds is very low due to the backing it receives. This is reflected in the low interest rates they bring. These interest payments that the bond holder receives twice per year are exempt from state and local taxes but the holder may still have to pay federal taxes. The other problem is the rate at which the bond matures. Low interest over a 30 year time could mean that the bond fails to keep up with inflation. Should this happen the bond holder would loose money in real terms when they go to cash their bond.

Another option is treasury notes which carry terms of 2, 3, 5 or 10 years. These provide a bit more of a pay off due to the shorter duration and higher risk. Treasury notes are sold at auction and you have the choice of placing a competitive or non-competitive bid. A non-competitive bid will guarantee that you win the note however you must accept the interest rate that is set at the auction. If you place a competitive bid you state the interest rate that you are wiling to accept. You may not win the note but if you do then you have your own set rate of interest.

Finally there are TIPS or treasury inflated protected securities. These work simian to treasury notes accept that they are adjusted to the rate of inflation. They are sold in terms of 5, 10 and 20 years. Each interest payment you receive will increase in theory due to the inflation adjustment. The only risk involved can occur in periods of deflation. An economic slow down that extended for a long period of time could decrease the face value of the security.

Discuss It!

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The only risk involved can occur in periods of deflation. An economic slow down that extended for a long period of time could decrease the face value of the security.

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Treasury notes are sold at auction and you have the choice of placing a competitive or non-competitive bid.

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