Introduction to US Treasuries

US Treasuries are bonds issued by the US government which are fully guaranteed. These bonds are regarded as risk free. As a result, US treasury is one of the most liquid financial products in the world.

Bonds, including the US Treasures, can be very complex. However, as an average individual investor, we do not need to understand all the small texts in their product specifications. This article aims to provide a brief introduction which is sufficient for an individual investor to make informed investment decision. (Please refer to this article for the instructions to purchase treasury products.)

In order to understand a bond including treasuries, we must understand the following three pieces of information:


The maturity of a bond means when its principal will be repaid. US Treasuries have a fixed set of maturities which range from 4 weeks to 30 years. Accordingly, treasuries can be classified into three categories:

The following snapshot is taken from the official Treasury Direct web site. The first three choices are corresponding to the three categories mentioned above:

Clicking on any of these choices will land a page with a list of specific products within that category. For example, the following is the list of Treasury Notes:

Because treasuries are issued regularly, there are different notes with the same maturity (e.g. 2-year) but different issue dates available for purchase.

Different products have different rules. Many offer investors the right of early redemption before maturity. It is always a good idea to understand this particular details of the products you are interested in.

Interest Rate (Yield, Coupon)

Interest rate of a bond is also called yield or coupon rate.

There are two basic types of interest rates: fixed and floating. As their names imply, fixed rate will be constant throughout a bond's life-time and floating rate may change periodically according to a set of pre-determined rules. Most treasuries (including Bills, Notes, and Bonds) are fixed rate bonds. However, the last product listed in the first picture above, FRN, is a floating rate product.

In addition to the fixed and floating rates, there are also some variations. For example, the i-bond which will be covered later in this article uses a hybrid model. Its effective interest is the sum of a fixed component and a floating component. The former stays constant throughout the i-bond's life-time, but the latter will be adjusted every six months according to the prevailing inflation data at that time.

Unlike, many other bonds, the rate of US Treasuries are determined through auctions. This is why there are two dates in the 2nd picture above. The interest rate is determined on the auction date and the treasury starts accruing interest on the issue date.

Interest Payment

Bonds can also be categorized based on how their accrued interest are paid. There are two basic types.

The first one is called zero coupon bond, or ZC bond. Though its name may suggest a 0% interest rate, a ZC bond indeed pays a non-zero interest. It achives this by selling at a discounted price below its face value. For example, a $\$100$ ZC bond may be sold at $\$99$ and will be repaid in full at $\$100$ upon maturity. Therefore, the $\$1$ difference represents the interest its investor can earn. Treasury Notes belong to this category.

The second type pays interest at pre-determined intervals such as every 6 months. If a bond maturies before the next payment is due, then the interest accrued during the last period will be paid at the maturity together with the bond's principal. Treasury Bonds usually use this method.

There are also some variations. For example, some bonds will calculate the interest every 6 months but will not hand out the interest payment as cash to the investors. Instead, these accrued interest will be added to the principal to start earning additional interest (i.e. compound interest). The i-bond discussed next uses this method.

TIPS and i-Bond

US Treasuries are similar to CDs in many ways, except that their maturities may be much longer. In order to protect savers from the impact of inflation when they commit to long term saving, the US government offers two special inflation linked treasury products: TIPS and i-Bond. Both share the feature that the return goes up when inflation goes up and the return goes down when the inflation goes down. TIPS achieves this goal by adjusting its nominal principal based on which the interest is calculated. I-Bonds achieves the same goal by adjusting its interest rate based on an inflation index.

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