Treasuries

Negotiable U.S. Government debt obligations, backed by itsfull faith and credit. Treasuries are issued by the U.S. government in order to pay for government projects. Themoney paid out for a Treasury Bond is essentially a loan to the government. As with any loan, repayment of principal is accompanied by a specified interest rate. These bonds are guaranteed by the "full faith and credit" of the U.S. government, meaning that they are extremely low risk (since the government can simply print money to pay back the loan). Additionally, interest earned on Treasuries is exemptfrom state and local taxes. Federal taxes, however, are stilldue on the earned interest. The government sells Treasuries by auction in the primary market, but they are marketable securities and therefore can be purchased through a brokerin the very active secondary market. A broker will charge afee for such a transaction, but the government charges no fee to participate in auctions. Prices on the secondary marketand at auction are determined by interest rates. Treasuries issued today are not callable, so they will continue to accrueinterest until the maturity date. One possible downside to Treasuries is that if interest rates increase during the term of the bond, the money invested will be earning less interest than it could earn elsewhere. Accordingly, the resale value of the bond will decrease as well. Because there is almost no risk of default by the government, the return on a Treasurybond is relatively low, and a high inflation rate can erase most of the gains by reducing the value of the principal and interest payments. There are three types of securities issued by the U.S. Treasury (bonds, bills, and notes), which are distinguished by the amount of time from the initial sale of the bond to maturity.