United States Government Securities

Definition

United States Government Securities are financial instruments issued by the U.S. Department of the Treasury to fund government spending activities. These securities are considered low-risk assets due to the creditworthiness of the U.S. government. They include a variety of debt obligations such as Treasury bills, notes, bonds, and savings bonds like Series EE, Series HH, and Series I.

Types of U.S. Government Securities:

1. Treasury Bills (T-Bills):

   • Short-term securities maturing in one year or less.
   • Sold at a discount from their face value and do not pay periodic interest.

2. Treasury Notes (T-Notes):

   • Medium-term securities with maturities ranging from 2 to 10 years.
   • Pay semi-annual interest at a fixed rate.

3. Treasury Bonds (T-Bonds):

   • Long-term securities with maturities greater than 10 years, up to 30 years.
   • Pay semi-annual interest at a fixed rate.

4. Series EE Savings Bonds:

   • Sold at a discount and accumulated interest is paid when the bond is redeemed, or reaches maturity.
   • Interest rates are typically fixed.

5. Series HH Savings Bonds:

   • No longer issued since 2004.
   • Paid interest semi-annually via direct deposit.

6. Series I Savings Bonds:

   • Sold at face value.
   • Feature interest rates that combine a fixed return and an inflation rate as measured by the Consumer Price Index (CPI).

Examples

• Example 1: Treasury Bill Purchase

  • An investor purchases a T-bill with a face value of $10,000 at an auction price of $9,800. Upon maturity, the investor receives the full $10,000, realizing a profit of $200.

• Example 2: Holding a Treasury Note

  • An investor holds a 10-year T-note with a face value of $5,000, paying an annual coupon rate of 2%. The investor receives $100 every six months in interest until the note matures.

Frequently Asked Questions

1. What is the difference between Treasury securities and savings bonds?

   • Treasury securities can be traded in the secondary market and include T-bills, T-notes, and T-bonds. Savings bonds are non-transferable and redeemable only by the registered owner.

2. Are U.S. Government Securities risk-free?

   • They are considered virtually risk-free with minimal default risk as they are backed by the full faith and credit of the U.S. government.

3. How can one purchase U.S. Government Securities?

   • These can be purchased directly from the Treasury through TreasuryDirect, or through a broker.

4. Do U.S. Government Securities pay state and local income tax?

   • No, interest earned on U.S. Government Securities is exempt from state and local taxes, but it is subject to federal income tax.

5. What are the terms of various U.S. Treasury securities?

   • Treasury bills: Up to 1 year.
   • Treasury notes: 2 to 10 years.
   • Treasury bonds: Up to 30 years.

Related Terms

• Government-Sponsored Enterprises (GSEs):

  • Financial services corporations created by Congress to enhance the flow of credit to particular sectors such as agriculture and housing. Examples include Fannie Mae and Freddie Mac.

• Municipal Bonds:

  • Debt securities issued by states, municipalities, or counties to finance public projects. Interest is generally exempt from federal taxation.

Online References

• U.S. Department of the Treasury
• TreasuryDirect
• Investopedia: U.S. Treasury Securities

Suggested Books for Further Studies

• “The Bond Book” by Annette Thau

  • Comprehensive guide to all types of bonds and effective investing strategies.

• “The Handbook of Fixed Income Securities” by Frank J. Fabozzi

  • Detailed reference covering various aspects of fixed income investments including government securities.

Fundamentals of United States Government Securities: Finance Basics Quiz

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