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Finance Dictionary and Glossary of Investment Terms
U.S. Treasury Securities
Negotiable U.S. Government debt obligations, backed by its full faith and credit. Exempt from state and local taxes. U.S. Treasury Securities are issued by the U.S. government in order to pay for government projects. The money 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 U.S. Treasury Securities is exempt from state and local taxes. Federal taxes, however, are still due on the earned interest. The government sells U.S. Treasury Securities by auction in the primary market, but they are marketable securities and therefore can be purchased through a broker in the very active secondary market. A broker will charge a fee for such a transaction, but the government charges no fee to participate in auctions. Prices on the secondary market and at auction are determined by interest rates. U.S. Treasury Securities issued today are not callable, so they will continue to accrue interest until the maturity date. One possible downside to U.S. Treasury Securities 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 Treasury bonds 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. also called Treasuries.