U.S. Government Securities are guaranteed by the U.S. government and exempt from state and local income taxes, making them some of the safest you can purchase. But because of the near absence of default risk they offer lower interest rates than do corporate issues. Government issues are actively traded on the over-the-counter market after their initial sale to large investors through an auction conducted by the Treasury.
Issued at a discount and repaid at face value at final maturity, T-bills pay no interest. They have the shortest maturation of all government securities: 91, 182, or 364 days. $10,000 minimum face value investment.
Maturing in the range of two to ten years, T-notes yield a steady stream of interest. $1,000 minimum purchase; most notes are sold in $5,000 denominations.
Long-term government debt that bears interest, T-bonds generally mature in ten years or longer. Like T-notes, they come in denominations of $1,000, $5,000, $10,000, $100,000, and $1,000,000 and are popular with traders and institutional investors. They are highly sensitive to interest-rate movements.
Zero Coupon Government Bonds
Long-term government debt that bears interest, which is all paid in a lump sum at the end of the term. Similar to other zero coupon bonds but tax free.
This limited series of bonds (the last issue was in 1971) can be redeemed at the time of the holder's death for the payment of estate taxes.
U.S. Savings Bonds
Unlike Treasury bills, notes, and bonds, U.S. Savings Bonds cannot be traded in a secondary market. They are sold mostly to individual investors who buy them directly from the Treasury. The most popular variety of U.S. Savings Bond sells at a 50 percent discount from its face value and is entirely free of commissions.
Through the sale of securities, the U.S. government has created more than $200 billion in debt yearly since 1985. Daily volume in U.S. Treasury securities is up to $100 billion.
Federal Agency Issues
The federal government does not back all these issues, however it authorizes a variety of its agencies to issue debentures and notes to finance their operations. Among these agencies are:
- Federal Home Loan Mortgage (FHLMC or Freddie Mac)
- Export-Import Bank
- Tennessee Valley Authority
- U.S. Postal Service
- Federal Intermediate Credit Bank (FICB)
- Federal National Mortgage Association (FNMA or Fannie Mae)
- Government National Mortgage Association (GNMA or Ginnie Mae)
As a group, these securities offer a higher rate of interest than direct U.S. Treasury obligations, even though the majority are backed by the full faith and credit of the U.S. government. Certain issues are also exempt from state and local taxes.