Ever wonder how the government is going to afford the bailout? Public debt. If you don’t know the difference between a T-Bill and a T-Note, this article should clear that up.
If you’re tired of rate chasing the latest high interest savings account and you don’t think the stock market is anything more than a Ponzi scheme, a third option you might consider is helping out America by buying some government bonds. (I’m not advocating that you buy bonds, but you should know how they work)
When it comes to government bonds, you can separate them into two types: bonds and securities. The basics of a bond are simple. A bond pays out interest at a certain interval until it matures. You can often redeem a bond, recoup your investment, before it matures. A security, for the purposes of government debt, is similar except that you can’t redeem the security, you must sell it (you cannot sell a government bond).
Here are the seven types of public debt and each differs slightly:
- Treasury Bills (T-Bills) – T-Bills mature in a year or less and don’t pay interest. Instead, you pay less than the face value of the bond and get the face value when it matures.
- Treasury Notes (T-Notes) – T-Notes mature in 2-10 years and pay interest every 6 months. The 10 year T-Note is what a lot of financial websites quote when they’re discussing treasury rates.
- Treasury Bonds (T-Bonds) – T-Bonds mature in 10-30 years, pay out interest every 6 months, and issued quarterly.
- Treasury Inflation-Protected Securities (TIPS) – TIPS are inflation-indexed bonds, pegged to the CPI, and have 5-, 10-, and 20-year maturities. The interest rate it pays is fixed, it’s the principal that gets adjusted every six months based on the CPI (though it never falls below your initial investment.
- I Bonds – These bonds have a maturity of 30 years and the interest rate is calculated based on a fixed rate and an inflation rate pegged to the CPI.
- EE/E Bonds – These bonds are sold at 50% of their face value and accrue interest every six months, with a final maturity in 30 years. They are designed to reach face value (so 2x in value) in 17 years.
- HH/H Bonds – Series HH bonds are no longer offered (as of August 31st, 2004) but I wanted to include them for completeness’ sake. They’re just like EE/E bonds except they were to reach face value in 20 years.
The Treasury Bills, Notes, Bonds, and TIPS are all marketable securities; you can sell them on the secondary market. The I, EE/E, and HH/H bonds are not, you can only redeem them.
Whew! Now you know a little more about the various products of the Treasury. Whether you want to buy any of them is up to you (and there’s more to it than that but I didn’t want to overwhelm you) but now you know, and knowing is half the battle. If you want a deeper look at Treasury products, I wrote a comprehensive post about Treasury bonds & securities that explains more.
Jim writes about personal finance at Bargaineering.com.