Investing in bonds is a common investment choice in America. In fact, according to Larry Burkett, most Americans will probably invest in a bond at one time or another during their lives. He considers bonds to be “the backbone for most long-range financial planning…especially in the 60-plus stage of (one’s) financial life.” (Investing for the Future).
There are corporate bonds and government bonds. The investment in the bond is typically for a predetermined amount of time. The value of the bond can fluctuate according to the prevailing interest rate.
Three Types of Government Bonds
There are three basic types of government bonds: savings bonds, Treasury bills (T-bills or T-notes) and Treasury bonds. They vary in denomination and length of the loan. They’re considered low risk since they’re a loan to the federal government. Interest rates are lower than their corporate bond equivalent.
- Savings Bonds: These are loans to the government usually for a period of 7 years or longer. Interestingly, they originated to provide funding for WWII and were first known as “war bonds.” This type of investment is considered very secure. The interest earned on savings bonds is not taxed until the bonds are redeemed at maturity. There is a large penalty if redeemed before.
- Treasury Bills: These loans are made to the U.S. government for periods from a few months to several years. The interest varies with current market conditions. Once again, the investment is considered lower risk.
- Treasury Bonds: This is one of the government’s main methods of financing its debt. These are sold in denominations of $25,000 or more for periods up to 30 years. Interest rates vary with market conditions. However, the rates are generally several percentage points lower than equivalent corporate bongs.