October, 2009

...now browsing by month

 

Are Treasury Bonds a Good Investment?

Saturday, October 17th, 2009

For all practical purposes US Treasury bonds are viewed as being financing instruments of the Federal Government and are oftentimes referred to as US savings bonds, though that is somewhat erroneous. Despite the fact that they are a near risk-free investment and pay better interest than a standard passbook savings account, they have lost some of their luster over the past few decades. From a historical standpoint, US savings bond came into being in order to finance the US Military Forces during World War I.

8 key advantages of treasury bonds

The popularity of US Treasury bonds stems from the many advantages they have for the long-term investor who wants to eliminate as risk as possible. These advantages include:

  • Treasuries are a low risk, relatively safe investment
  • The treasuries market is one of the world’s most liquid fixed-income market
  • Dealers make a profit by purchasing them at a lower price than what they earn once they have reached full maturity
  • Immediate price dissemination and liquidity provide investors with immediate knowledge of the bonds’ value
  • US Treasury bonds can be purchased and sold electronically
  • The interest on these bonds is not subject to local or state income tax even though they are subject to federal income tax
  • Unlike the majority of other bonds as well as other mortgage-backed securities, US Treasury bonds cannot be redeemed prior to reaching their maturity date
  • Treasuries are excellent loan collateral based on their high-credit liquidity and quality

    • What are the disadvantages?

    Despite the 8 key advantages listed above, there are two disadvantages to be aware of:

  • US Treasury bonds offer a relatively low YTM or Yield to Maturity
  • They are subject to huge political risk factors because the US
  • Government can print as much money as they see fit in order to avoid defaulting on financial debt
  • Where the higher risk and long-term investor is concerned, US Treasury bonds do not appeal to many investors

    • Are Treasury Bonds Worth Investing In?

    For the individual that is looking for an investment which is literally risk-free and doesn’t mind the lower YTM (see above), US Treasury bonds are great investments. However, if you are a risk taker seeing high ROI, then this may not be the financial instrument you want to invest in. Additionally, most of the US savings bonds that have been issued since 1965, they earn interest for a period of 30 years while eventually reaching maturity.

    Another plus is that they can be purchased relatively easily and can even be part of your employer’s payroll retirement or savings plan. US savings bonds currently pay 5.68% interest, roughly 90% of the average interest rate of US Treasury bonds. If that current rate of interest were maintained, today’s bonds would reach their maturity (face value) roughly 12 years. Suffice it to say, for those investors whose primary priority is protecting their investment and principal, these types of bonds have tremendous appeal.

    Posted in Investing | No Responses »
    Tags: , ,