For a steady stream of income, bonds are your most obvious option. But there are many different types of bonds, each with a slightly different level of risk and return on investment. Generally speaking, the safer the bond, the lower the yield.
Two of the safest and most popular bonds on the market are U.S. Treasury Bonds (T-Bonds) and Treasury Notes (T-notes). In fact, all U.S. Treasury debt securities, including bonds, bills, and notes, are considered to be virtually immune from default because they are backed by the safest entity on earth - the U.S. government. Even if the government doesn't have the funds to pay off its securities, it can simply print more money.
The government stopped issuing 30-year bonds in 2001, but you can still buy them on the secondary bond market. The Treasury continues to issue notes, which are identical to bonds in nearly every respect except length of maturity (and yield). While bonds were issued only with 30-year maturities, notes come in shorter terms, including 2 years, 3 years, 5 years, 7 years, and 10 years.
Although the federal government is the largest issuer of bonds, it is certainly not the only entity that uses bonds to raise money. They are also popular with state and municipal entities as well as most major corporations. Bonds typically pay interest every six months throughout the term of the bond. Bonds mature at the end of a prespecified term, at which time the bondholder receives an amount equal to his or her original investment ( the principal). For instance, T-bonds were issued with a 30-year maturity - the longest of all government bonds - which mean that they paid a preset amount of interest each year for 30 years before the principal was returned to the bondholders.
The excessive length of maturity of the 30-year bonds kept many buyers away, which is why the government discontinued selling those bonds in 2001. With their shorter maturities, T-Notes had become much more popular than T-Bonds.
In addition to the safe, steady income Treasury securities provide, they also offer one other alluring benefit - the interest they pay is exempt from state and local taxes. Because of the separation of federal and state powers mandated by the U.S. Constitution, states cannot tax federal securities - and the federal government cannot tax state and local securities. That tax exemption makes the after-tax return from Treasury securities much more attractive. However, interest from bonds and notes is still subject to federal income taxes.
T-Bonds and notes may not appeal to investors looking for the highest possible return, but if you are looking for safety, they're hard to beat.
