 Personal Finance PowerPoint Presentation, Treasury Bond or T-Bond, prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Treasury Bond, T-Bond, which you can find online. Take a look at the references, resources, continue your research from there. This is by James Chen, updated April 2nd, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping them in mind. We're now asking, what is a Treasury Bond or T-Bond? Treasury Bond, T-Bond are government debt securities issued by the U.S., United States, federal government that have maturities greater than 20 years. So they're a type of bond, which we can think of as a kind of note. We can think of it as similar to us loaning money, say, to the issuer of the note, that being the U.S. government, they are long-term because they're greater than the 20 years. So just a quick breakdown note that we can imagine here, we're loaning in essence money to the government in exchange for a promissory note to pay it back in the future, plus most likely some kind of interest. So we've got a maturity date, we've got the face amount of the note that we're going to be having, how much they're going to be giving us back at the maturity time, and then typically we're going to have what's equivalent to kind of rent on the loan that we made. For example, if we were to rent an apartment, then typically we would have the apartment coming back to us or our original investment that we've loaned, and then we would also have the rent on it, the rent being equivalent in essence to interest here. So T-Bonds earn periodic interest until maturity. So maturity is the ending period at which point in essence you can think of as you get the face about or kind of like the return of in essence the property in essence. So at which point the owner is also paid a par amount equal to the principal. Treasury bonds are part of the larger category of U.S. sovereign debt known collectively as treasuries, which are typically regarded as virtually risk-free since they are backed by the U.S. government, the United States government ability to tax its citizens. So obviously when you have these kinds of investments, they're typically going to be more secure types of investments, and that means there's generally going to be less flexibility. So when you were thinking about bonds, for example, versus say stocks, we would think that the bonds could be more secure if the person that you're loaning the money to and buying the bond from is secure. And you would think that the U.S. government would be as secure as you can get because they have the ability to tax, they have the ability in essence to print money if they didn't service their bond obligations. That would be very bad for the economy. So you would think that the risk there quite low. So understanding Treasury bond, T bonds. Treasury bonds, T bonds are one of the four types of debt issued by the U.S. Department of Treasury to finance the U.S. government's spending activities. So obviously if they're issuing, you're buying the bond directly from the government, you are in essence kind of loaning the government money, and the government could then of course use that money. However, the government feels that they should be using the money funding the government activities. So they'll kind of put it into fire and burn it and just for the fun of it and see what happens. See how big the bond fire they could get with that. Now they'll use it for very efficiently and well. So the four types of debt are Treasury bills, Treasury notes, Treasury bonds, Treasury inflation protected securities or TIPS. These securities vary by maturity and coupon payments. So we've talked a bit about these individually. And so they have some differences in terms of maturity dates, how long they're going to be extending. We're now looking at the longer ones, which are going to be the T bonds and the coupon payments. So all of them are considered benchmarks to their comparable fixed income categories because they are virtually risk-free. So oftentimes when we think about other categories of say related kind of investments like corporate bonds and those kind of things, we might try to use the Treasury bonds as the benchmark because the idea would be that the Treasury bonds don't have the same kind of levels of risk related to them. So you can kind of use it as a baseline to be comparing similar other types of securities. So T bonds are backed by US government, the United States government and the US United States government can raise taxes and increase revenue to ensure full payments. So when they increase revenue, obviously revenue to the government is taking the money, right? Taking the money from people through the taxation. So if they could pay with the power of taxation, you would think that they would be fairly secure to pay off their debts if they needed to just raise the taxes. So these instruments are also considered benchmarks to their respective fixed income categories because they offer a base risk-free rate of investment with the categories lowest return. So clearly you're generally going to have the lowest return with the T bonds because if something is in essence risk-free, then that means that the government can issue them at lower returns, paying lower, basically rent or interest on it because of that low risk. And that's one of the benefits, of course, if you have confidence that people have trust, then typically that's valuable, clearly. So that's a valuable thing. So T bonds have long durations issued with maturities of 20 to 30 years. So long term, as is true for other government bonds, T bonds make interest payments semi-annually and the income received is only taxed at the federal level. So Treasury bonds are issued at monthly online auctions held directly by the U.S. Treasury. A bond's price and its yield are determined during the auction. So you've got the same kind of auction kind of situation that help determine on a market basis basically what the price should be. So after that, T bonds are traded actively on the secondary market and can be purchased through a bank or broker. So these are more long-term bonds. So clearly you would expect that they would also have kind of that secondary market. The primary market would mean that we bought the bonds from the issuer of the bonds that in this case being the government. If you bought the bonds from the government, you're giving the money directly to the government in exchange for the bonds, basically the notes and so on. But then people can buy and sell these bonds on the secondary market and that means that you're buying or selling from another investor, not working with the issuer directly at that point. So individual investors often use T bonds to keep a portion of their investment savings risk-free to provide a steady income in retirement. So the fact that they have that basically return gives you some income. The income is fairly low, but the fact that it's going to be, in essence, they're saying risk-free would give you more security even if there's going to be fluctuation in the economy. So to set aside savings for child education or other major expenses, so when you're saving for education or something like that and your time horizon is not as long, then you might put more of your investments in treasury bonds because you don't want to drop like right before the end date when you need the money, for example. So investors must hold their T bonds for a minimum of 45 days before they can be sold on the secondary market. Treasury bond maturity ranges. Treasury bonds are issued with maturities. That's the ending term that can range from 20 to 30 years. So the end of the bond is the end of the when they're going to mature, you're loaning the money in essence, kind of. And then at the end, you've got that maturity time frame. So when they pay off the face amount and so on. So they are issued with a minimum denomination of $100 and a coupon payments on the bonds are paid semi-annually. So if you rent something like property, for example, then you usually pay the rent monthly. With the bonds, you're talking semi-annually every six months in essence, that the interest, which is kind of like similar to the rent on what has been borrowed, in this case, not property, but money, therefore not rent, but interest. The bonds are initially sold through an auction. The maximum purchase amount is $5 million if the bid is non-competitive or 35% of the offering if the bid is competitive. A competitive bid states the rate the bidder is willing to accept. It is accepted depending on how it compares with the bond set rate of the bond. So the non-competitive bid ensures the bidder gets the bond, but they have to accept the set rate. So if you're doing the competitive bid, you can try to do a market kind of negotiation type of thing more or less to help set the price. The non-competitive bid, you're accepting the price that basically has been kind of like generally that will take the average of the competitive bids and that will then be the price they'll use for the non-competitive bids. After the auction, the bonds can be sold in the secondary market. So the treasury bond secondary market. There is an active secondary market for T bonds making the investment highly liquid. So the fact that you're locked in to this 20 year thing, you might say, well, then I don't have a lot of liquidity with it, but because these are, these are in essence risk-free kind of investments, you can of course, fairly readily sell them on the secondary market, although of course what you can sell them for may vary given the market conditions. So the secondary market also makes the price of T bonds fluctuate considerably in the trading market. So obviously when you think about the bond, remember what you have on a bond typically is a maturity date, which might be fairly far into the future with the long-term bonds. You've got the interest, so how much they're gonna be paying on a semi-annual basis with the interest in the face amount and what you expect to get at the end or the maturity basically of the bond. So given that you can't really adjust the interest rates as interest rates adjust in the market because those have been fixed once the bond has been issued, what you can adjust is the bond price, what you sell the bond for at a premium or a discount. So there's still, you can sell them on the secondary market but you're not gonna change the interest rate to do so, but you're gonna change instead the sales price. So similar to other types of bonds, T bonds on the secondary market, you see prices go down when auction rates increase because the value of the bond's future cash flow is discounted at the higher rate inversely when prices decrease, auction rate yields decrease. Treasury bond yields and the fixed income market T bond yields help to form the yield curve, which includes the full range of investments offered by the U.S. government. The yield curve diagram yield by maturity and is often upward sloping with lower maturities, maturities offering lower rates than longer dated maturities. However, the yield curve can become inverted when long-term rates are lower than short-term rates and inverted yield curve can signal an incoming recession. So when you're trying to kind of predict what's gonna happen in the economy, oftentimes you'll hear a lot about the yield curve and the inversion of the yield curve being a danger, danger zone. You're in the danger zone.