How to Buy Treasury Bonds

Purchasing a Treasury bond is like lending money to the US Government — buying the bond means buying the rights to interest payments every six months over the life of the bond, as well as owning the rights to a cash payment of the bond par value on the bond’s maturity date.^[1] If you are a new investor, treasury bonds are a great way to learn about investing and earn some interest. If you already have a developed securities portfolio, treasury bonds can strengthen your investment and shield it against market changes.

EditSteps

EditChoosing a Bond Investing Strategy

1. Familiarize yourself with bond terminology. A bond's "par value" is the amount of money the Treasury will pay the bondholder (you) on the bond’s maturity date. Bonds are sold in par value increments of $100. The "maturity date" of a treasury bond is always 30 years from the date the bonds are issued. In addition to par value, bonds are sold at a given "interest rate," which is the percentage of the bond par value the bond will pay in interest every six months. Finally, buyers can purchase bonds above or below par value to receive a specific "yield." Yield is calculated by dividing the coupon rate by the price paid for the bond. Treasury pays the holder each six months.
   • If the yield determined at auction is higher than the bond's stated interest rate, the bond will sell at a discount, or less than the par value of the bond. If the yield determined is less than the bond interest rate, the bond sale price is higher than the par value of the bond.^[2]
   • Here is an example of a treasury bond with a par value of $100 and an interest rate of 5%. Before the auction, bidders already know that bondholders will receive $2.50 in interest every six months on this bond, and that they will receive $100 when the bond matures. However, at auction, the bidding determines the yield for the bond should be 6%. So, the Treasury reduces the purchase price of the bond to $83.30, which makes the yield, (interest payment / purchase price or $5.00 / $83.30), 6%. You buy the bond for $83.30 on the purchase date. Every year you receive a payment of $5.00 (or 6% of $83.30) until the bond matures, and then on the maturity date the Treasury pays you back the $100 par value of the bond.
2. Assess your investing needs. Ask yourself what you hope to get out of investing, and assess how much money you can invest in bonds in the short and long term future. Bonds pay out in two ways: bi-annual interest payments and maturity payments of the bond par value. For example, if your goal in saving is to have a lump sum available at some point in the future, like for retirement or education, you will benefit from buying multiple bonds that mature on or around the same day.
3. Determine your investment strategy. Many people use the interest they earn on their bond investments, and the bond maturity payments when the bond is redeemed, to invest in more bonds. By having investments in multiple bonds, you will diversify your portfolio and earn residual interest. Here are some investment strategies to consider:
   • One investment strategy is to build a bond ladder, so that at a recurring interval you buy a new bond with the proceeds of the sale or maturity of another bond investment in your portfolio.^[3] You can build ladders for as little as $200 (or the price of two bonds), and because bonds are a very secure investment, your investment is a lot like a High Interest Savings account.
   • You may also consider buying many bonds that all mature around the same time, such as for a college savings account. If you are investing to fund your daughter's education, you buy a $100 par value bond each month with a maturity date sometime between the years your daughter will be 18 and 23. You will receive investment income every six months until then that you can reinvest or use for expenses, and when your daughter graduates from high school you can use the bond par value payouts to pay for her college.
   • While you can invest as much in money in bonds as you would like, remember that the stock market does tend to average higher returns than bonds in the long term. You should consider bonds as one of many investment options for long term investments.^[4]

EditBuying Treasury Bonds

1. Decide how you will buy. If you are a borrower who plans to buy multiple kinds of bonds, purchase and trade often, or purchase and trade other kinds of securities such as stocks, you should consider using a broker to manage your investment activity. Investment brokers can help you develop an investment strategy, or do the legwork to implement yours. If you're not planning and buying multiple types of securities, the US Treasury allows investors to buy and sell bonds directly through their site http://ift.tt/1WNUWe5 without having to work with a broker or bank.
   • Brokers can be generally categorized as either full-service or discount brokers. ^[5] Discount brokers, like their name suggests, are affordable trade facilitation services. This may be as basic as an e-trade account, where you register with the broker, e-trade, and use their service to buy, sell, and monitor your investments. A full-service brokerage can be as personalized as an agent who develops an investment strategy for you, and even buys and sells on your behalf with your permission.
   • If you are investing a small amount of money or are new to investing, a discount broker is probably your best choice. Using a discount broker will save you the higher cost of full service, and give you the opportunity to learn a bit about trading while making your first investments. Most discount groups like etrade or scottrade provide investors with learning materials, so you won’t be completely on your own.
   • To create an account using a broker or through TreasuryDirect you will need your social security number (or EIN if you are a business), email address, and bank routing and account numbers to fund your purchases and collect earnings.
   • TreasuryDirect users can purchase and sell treasury securities of all kinds on the site, and can even schedule recurring purchases, or repurchases of new bonds, such as for the ladder or lump sum investment strategy. ^[6]
2. Pick an auction. The US Treasury holds bond auctions every February, May, August, and November, when it issues new bonds with maturity dates 30 years in the future. In the other months of the year, the treasury reissues older bonds, with maturity dates closer to the date of sale. You can place bids on the auction date itself, or you can schedule purchases in advance by specifying the par value of stock you will buy and agreeing to pay the determined noncompetitive purchase price.
3. Place your bid. Treasury bond auctions are made up of two phases, first of competitive and then of noncompetitive bidding. During competitive bidding, bidders specify the par value of bonds they want to purchase, as well as the yield they require. They are awarded all, some, or none of the par value they bid on, based on how their bid stacks up against the other bidders. After competitive bidding is complete, the Treasury takes the average bond yield rate of the wining competitive bids, and awards noncompetitive bids at that yield.^[7]
   • Noncompetitive bidding is the most common form of bidding for new or modest sized bond purchases. Noncompetitive bidders agree to accept the high yield determined by the competitive auction, and specify the amount of bond par value they will purchase.
   • Competitive bidders are usually institutions or market experts, and they bid against each other for bond par value. They bid stating the amount of par value they want to buy and the yield they want to receive. The Treasury awards bids starting with the bid for the lowest yield, although no one bidder can buy more than 35% of the total offering.
   • Competitive bidding is complex and requires more knowledge than this outline provides. To place a competitive bid you should learn about the market, look at recent bond sale discount or premium rates for the type of bond you want to buy, and work with a broker or on your own to predict how inflation stacks up against the interest rate offered on the bond.

EditThings You'll Need

For opening Treasury Direct or other account:

• Social Security number
• Driver's license number or state ID
• Bank routing number and account number to an account with funds for your purchases
• E-mail address
• A browser that supports 128-bit encryption

EditRelated wikiHows

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• Trade Forex
• Earn Regular Income from Stock Investing Via Dividends

EditSources and Citations

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source How to of the Day http://ift.tt/AtpMaD