This article is from the Investing Articles: Bonds series.
The U.S. Treasury issues five types of debt securities. They differ from each other in their maturities, in the frequency with which they are offered, in the interest rates they pay, and the way in which the interest is paid. But they share the reputation of being absolutely safe.
The most common issues are bonds, which have 30-year terms, notes, available with 2-, 5- or 10-year terms, and bills, available with 13-, 26- or 52-week terms. The others are Treasury STRIPS, which are government zero-coupon bonds, and cash management bills, which are infrequently issued short-term securities.
Treasury bonds, sometimes called long bonds or benchmark bonds, are sold three times a year in February, August, and November, and pay the highest interest. Notes with 5- and 10-year terms are available in those three months and also in May. The 2-year notes are available once a month, 52-week bills every four weeks, and the other bills weekly.
Treasury issues are sold in $1,000 increments, and you can invest as little as $1,000 or as much as $1 million. You can buy and sell directly, through a program known as Treasury Direct. But like other debt securities, Treasury's are traded in the secondary market after issue, and their prices fluctuate to reflect changing demand.
The Treasury sells marketable bills, fixed-principal notes and bonds, and inflation-indexed notes and bonds in regularly scheduled auctions. Bills, fixed-principal notes and bonds, and inflation-indexed notes and bonds are freely transferable. They are traded in the highly competitive global capital markets. They are available in book-entry form in the commercial book-entry system through a financial intermediary.
Treasury securities generally are not callable prior to maturity. The exception is that prior to 1985, the Treasury issued marketable, callable long-term bonds, and many of them remain outstanding. The Treasury can redeem those callable bonds on their first call date, which is five years prior to the maturity date, or on any semiannual interest payment date thereafter. The Treasury must provide four months' notice before calling a bond. In fact, we have called a number of bonds during their call periods.
Until late 1998, the method for selling marketable Treasury securities generally had been multiple-price auctions. In a multiple-price auction, we accepted the yields (discount rates in the case of Treasury bills) that were bid competitively from the lowest to the highest yield required to sell the amount offered to the public. Competitive bidders whose tenders were accepted paid the price equivalent to the yield (or discount rate) that they bid. Noncompetitive bidders paid the weighted-average price of accepted competitive bids.
Trading Treasury SecuritiesU.S. Treasury securities can be purchased at the auction either directly from the government or through your local brokerage.
In order to purchase U.S. Treasury securities from the government you must establish a Treasury Direct account. This can be done by mail or in person through a local Federal Reserve bank (under "Banks" in the phone book). Since the U.S. Treasury no longer issues certificates your securities will be held in electronic form (book entry) and interest payments will be wired to your account every six months. When the security matures you will be wired your principal as well.
A broker can also purchase bonds for you at the auction and save you the trouble of setting up an account as well as providing one central place for all your interest income.
US Treasury Auction Schedule here. (http://www.ustreas.gov/offices/domestic-finance/)