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How Treasury Bonds Work

The term “treasury bonds” refers to a number of different securities issued by the US Treasury Department. The Treasury issues a variety of securities in order to fund government activities. Uncle Sam issues these notes because the amount of taxes the federal government collects is lower than government spending. This is the national debt or deficit that you are constantly hearing about on the news.

Treasury-backed securities are considered a good investment because the government can collect more taxes or print more money to pay them. More importantly the United States government has never defaulted on its obligations. That is why Treasury securities are usually given the highest rating. It is also why most investment experts recommend that everybody keep at least part of his or her money in Treasury securities.

Types of Treasury Bonds

The Treasury actually issues a number of different debt instruments that anybody who has the money can invest in. The most popular offerings include:

Treasury notes are securities with maturation periods ranging from 2 to 10 years. Maturation means the bond has to be cashed in at that time. These instruments pay interest every six months.

Standard Treasury Bonds mature in 30 years and pay interest every six months. The I Savings Bonds are a low risk savings product that you can purchase directly from the Treasury or through a bank for as little as $25. They have a low interest rate that corresponds to inflation and they are sold at face value. They mature in 30 years. EE savings bonds are a similar product that is purchased in much the same way.

Treasury Inflation Protected Securities or TIPS are kind of bond with an interest rate that is pegged to inflation. That means the TIPS rate rises and falls with inflation which protects money from inflation.

Treasury Bonds and Taxes

Treasury bonds are exempt from state and local income taxes but interest on them is considered taxable income by the IRS. You will have to file a 1099-INT form with your tax return for any income you earn from a Treasury bond. Any income made from TIPS is also subject to federal income taxes but exempt from state and local income taxes. You will need to file another form called a 1099-OID with your tax return if you have TIPS.

Purchasing Treasury Bonds

The best way for an average person to purchase Treasury bonds is through the Treasury Direct website. This site will allow you to buy bonds directly or to set up payroll deduction purchase programs. You should buy the bonds directly to eliminate brokerage fees and reduce costs.

Are Treasury Bonds a Good Investment?

Treasury bonds are a good investment for the average person. They are safe, relatively liquid, easy to buy, easy to sell and they offer some tax advantages.

Unfortunately the return on them is not necessarily that high. Therefore the average person will need to invest in some other higher return instruments such as stocks or mutual funds. A good strategy would be to put 10% to 20% of your savings in Treasury bonds.

Despite what some people think Treasury bonds are not without risk. The US government has never defaulted on its obligations but many other governments have. The possibility it will default is remote but in August 2011 the respected ratings agency Moody’s threatened to downgrade the US’s rating as a bond issuer. That means Moody’s experts believe the US had a slightly higher risk of defaulting on its obligations. It should be noted that Moody’s did not downgrade and Uncle Sam kept his top bond rating of Aaa. This means there are some risks to US securities but they are low.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.


How the Bond Market Works

The term bond is used to describe a wide variety of securities traded on US and other markets. A bond itself is essentially a loan, in which the buyer loans money to the issuer. The difference is that the buyer has the right to sell if the bond if he or she wants. There are many different kinds of bonds around all of which trade much like stocks or commodities.

The bond market is highly complex and unlike the stock, currencies or commodities market is not widely traded in by average people. Instead most bond trades are performed by professionals on behalf of large institutional investors. An exception to this is the Treasury bond market where a large amount of average people participate.

Bond Market Classifications

The major bond market classifications are: US Treasury (bonds issued by the federal government), corporate bonds or corporate paper (bonds issued by big business), high-yield or non-investment grade or “junk” bonds (bonds in risky businesses such as startups), mortgage backed securities (bonds backed by mortgages), asset-backed securities (paper backed by some sort of individual or corporate debt usually auto loans or credit cards), agency bonds (securities issued by corporations backed by the federal government such as Fannie Mae), municipal bonds (securities issued by state or local governments) and collateralized debt obligations or CDOs (another kind of bond backed by debt).

Each of these kinds of bond trades on its own market. Generally an issuer creates a security and releases it on the market where it thinks it raise the most money. A number of different mechanisms are then used to determine the bond’s price and value. These include yield to maturity which is the amount of income bond can generate through interest.

How Ratings Affect the Bond Market

The bond’s rating also affects its value. The big three ratings agencies (Moody’s, Standard & Poor’s, Fitch’s) evaluate bond issuers to determine how likely they are to default. The securities are given grades such as CCC or AAA, a top rated bond would be AAA while a low rated one would be CCC.

The greater the capability that an issuer has to meet its obligations the higher the rating the bond gets. Higher-rated bonds generally have a higher price and a lower interest rate. Lower rated securities such as junk bonds and CDOs pay a much higher interest rate but they are more risky.

Generally government issued bonds such as US Treasuries are the highest rated. Municipal bonds can run the gamut from junk bonds to highly rated ones. When you’ve heard that a ratings agency has downgraded a company or government it has given that entity’s bonds a lower rating. Lowering the rating increases the cost of borrowing money but it can make the paper a more attractive investment because it has a higher return.

Benchmarking of Bonds

The common method of determining bond value and risk is called benchmarking. In this practice an expert compares an issue with a highly rated security or benchmark. An analyst might compare Smallville Sewer District Bonds with US Treasury bonds to see how safe they are. The more characteristics Smallville’s issuing shares with US Treasury notes the better it will be ranked.

The Bond Market and You

The average person should confine his or her bond investment to diversified bond funds and to US Treasury Bondss. This market is simply too complex and fraught with peril for the average person to risk his or her money. Everyday there are stories about people who lost everything investing in asset backed securities or CDOs. Yes bonds are very secure and you should put part of your portfolio in them but you must keep your exposure to the bond market limited.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Ordinary Annuity, Retirement Annuity, and Income Annuity.

How the Gold Market Works

What we call “the gold market” is actually a network of exchanges around the world where gold is traded as a commodity. What is traded on these markets is not actual gold but contracts, or options to buy and sell specific amounts of precious metals.

The traders don’t take possession of the bullion instead it remains safe in vaults mostly in London. The movement is done purely on an electronic network the gold is measured in troy ounces. Only 24 karat or 100% pure bullion is traded which is why the price for most gold jewelry is much lower than that published in the newspaper. Most jewelry is made from less than 24 karat gold.

The Nature of the Gold Market

In reality, the gold market is a commodities market just like those for wheat, oil and other minerals. The market treats the metal like any other commodity despite its history and high price. You should remember that the gold market is a market subject to the same forces as other markets.

Despite what many people think the gold market is subject to bulls and bears just like any other market. It can also be affected by bubbles or huge irrational increases in price that can suddenly collapse. Gold lost 16% of its value between September and December of 2011. During the 1980s the price fell by nearly half.

The difference is that gold often runs in the opposite direction of the stock market and the rest of the economy. When economic times are good optimistic, investors pull money out of precious metals and buy equities or securities. When times are bad panicky investors often put a large percentage of their money into gold.

That means the market for precious metals is just as irrational as the stock or real estate market. The safety that many people assume is that it offers largely an illusion. Funds invested in the gold market are just as vulnerable to market forces as funds invested elsewhere.

How the Price of Gold is Set

The price of a troy ounce of 24 karat gold is determined by trading on a number of key exchanges in the Over the Counter Market. These exchanges set the price used around the world and the basis of the retail prices charged for the metal. The price paid for jewelry or coins is usually a percentage of the gold price.

The main trading venues are the London Bullion Market, the New York Mercantile Exchange and the Tokyo Commodity Exchange. The most important market is London where the price of gold is set by trading among members of the London Bullion Market Association. This is a trading venue for major banks, bullion dealers and gold refiners. London sets the price because it has the highest volume of trading in the world. The standard international price is that at which gold is moving at in London or was moving at when the market closed.

There are several other gold exchanges around the world including the Chicago Mercantile Exchange. There are also national and regional exchanges in Canada, Australia, China, India and the Middle East. None of these are as important as London or New York.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Single Premium Immediate Annuities, What is an Annuity, and Current Annuity Rates.

How Value Investing Works

A value investor is somebody that believes the market is an unreliable means of determining the value of investments. Therefore instead watching the movements of the market he or she tries to determine the real value of equities and securities.

This is usually done through a careful analysis of the underlying value of a vehicle. A value investor will usually read through the prospectus, yearly statements and other documentation available an investment. In the case of a stock he or she will take a close look at the industry and may even visit the facilities of a company he or she is investing in.

Cash Value is the Key

Value investors believe that a decision to purchase a stock should be based upon its present cash value not on any future value. The value investor is not interested in growth potential or future earnings. He or she wants to know what the investment is worth now.

This is why value investors concentrate upon existing companies with a proven track record. A value investor will ignore the hot IPO and purchase an established company such as Microsoft. Microsoft has a track record, a proven product and an existing customer base. It is making money right now so its earnings are real.

Value investors also look at the amount of debt a company has. They would not buy shares in a growing retailer that has issued a lot of paper to finance expansion plans. Instead they would purchase a smaller chain with a large cash reserve.

Value Investing Formulas

A lot of value investors base their decisions upon a formula. The classic formula was invented by the great investor Ben Graham in the 1930s. It is a stock’s intrinsic value is determined by multiplying current earnings x the expected annual growth rate. The expected annual growth rate is the amount by which the value is supposed to grow over a 7 to 10 year period.

As you can see value investors are interested in long term growth not in short term gains. They are also interested in security and a margin of safety which is why they look for proven companies with a track record of making money.

Most value investment formulas also contain a margin of safety. That is an estimated level of risk with the stock. If the margin of safety is too small value investors will not buy. If you want to test value investing formulas there are a number of value investment simulators available online.

Value Investing vs. Speculation

Value investing as practiced by people like Ben Graham and his pupil Warren Buffett is intended as an alternative to speculation. Speculation is the purchase of securities, commodities or equities solely for short term gain.

The speculator is not interested in intrinsic value because she wants to sell for a quick profit. The value investor wants something that she can hold onto for a long time. That is why he or she carefully evaluates everything he or she buys.

Limitations to Value Investing

There are some serious limitations to value investing its practitioners often miss out on a lot of the excitement inherent in the market. They usually miss the huge profits made in bull markets but they also miss the losses from bear markets.

It is a great strategy for retirement investment but not for an active trader. People who like to constantly watch and monitor the market often grow bored with it.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.

How Identity Theft Works

Identity theft is the use of somebody else’s information to steal or defraud. Despite what a lot of people believe such theft is not a new crime, nor is it necessarily a high tech crime.

Identity theft can be anything from somebody trying to cash one of your checks to a cyber criminal hijacking your bank account. Not using computers or online banking will not protect you from identity theft. There are many different methods of stealing somebody’s identity out there. Among the most common are:

Trash Can or Dumpster Diving

This is an old low-tech method of stealing info but it’s still a highly effective one. The predator simply goes through trash cans or dumpsters until he finds documents with financial information on them. Then he uses the information to steal money.

Let’s say James threw out his old checks or bank statements and Joe Rat found them. Joe Rat could make fake checks with the account and other information on them and cash them. He could also use the information to get into James’ online banking and transfer James’ cash into his account.

The way to stop this is simple: shred, burn or rip up any piece of paper with confidential information on it. This includes checks, bank statements, anything with account information your driver’s license number credit card numbers or Social Security number on it.

Surfing or PIN Number Theft

This is another oldie but goodie there are several variations. The classic is that the thief simply watches while you enter your PIN number at the ATM. Another version involves a fake card reader that records your information. The crook puts this on an ATM or cash register. Then when you swipe your card the information goes to his computer and he can use it to access your bank or credit card account.

Accounts in Somebody Else’s Name

Another common tactic is for the crook to get somebody else’s Social Security number, insurance information or driver’s license. With this he can open accounts in your name. He can even apply for insurance or use your insurance.
This is why you should only give your Social Security number to people you trust. Never give out the number unless there is a valid reason for somebody else to have it.

Many criminals operate “phishing” scams which involve an e-mail or a phone call that asks for your information. This sometimes looks like an official communication from your bank or even from Paypal. Others may come from the IRS which never uses e-mail to communicate with taxpayers.

Combating Identity Theft

The best way to combat identity theft is to constantly monitor all of your accounts and insurance policies. Sign up for online banking on all of your accounts and check them at least once a week. You can even set up text or e-mail alerts that tell you of unusual activity. Watch for unusual activity and contest anything unusual.

If you lose any sort of ID or credit card report it at once. Cancel any credit card that disappears as soon as you can. If an insurance card goes missing contact the insurance company. Check the policy activity online to see if anybody else is using your insurance.

Predators are now targeting all sorts of accounts including brokerage and credit card accounts. Monitor them regularly and change the passwords regularly. Also make sure all information about accounts is secure keep paperwork in a hidden or secure lockbox or encrypted data device. Destroy any paperwork with account numbers on it as soon as you no longer need it.

If you feel particularly vulnerable you should check into identity theft insurance. Several major companies offer it and it can reimburse you for identity theft losses. Persons that travel frequently should get such insurance because travelers are more vulnerable to identity theft.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Calculator, Annuity Interest Rates, and Annuities Good or Bad.