What Are Treasury Bonds? - Definition & Rates

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  • 0:03 Definition
  • 0:30 Why People Buy Treasury Bonds
  • 0:57 Treasury Bond Example
  • 1:26 U.S. Treasury Bond…
  • 1:54 Purchasing Treasury Bonds
  • 2:08 Lesson Summary
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Lesson Transcript
Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

In this lesson, you'll learn about treasury bonds, which are basically a way for governments to borrow money. Treasury bonds are considered low risk investments, and therefore, pay a lower yield to investors.

Definition

Treasury bonds are defined as U.S. government debt securities with a maturity of more than 10 years but less than 30 years. Treasury bonds pay a fixed rate of interest each year. The interest payments are made twice a year. Investors receive the face amount of the bond at maturity. The market price of a treasury bond may be higher or lower than the face amount, depending on the rate paid by the bond compared to prevailing market interest rates.

Why People Buy Treasury Bonds

Treasury bonds are backed by the full faith and credit of the U.S. government. For this reason, treasury bonds are generally considered risk-free investments. Due to their lack of default risk and extremely high level of liquidity, Treasuries usually offer the lowest yields of bonds with similar maturities and are considered benchmarks of the fixed income asset class. A fixed income asset is one that pays a specific interest income to the investor over a specific period of time.

Treasury Bond Example

To illustrate how treasury bonds work, let's go over an example. Let's say John Smith buys a treasury bond from the U.S. government for the face value of $10,000. The term of the bond is 10 years, with a coupon rate (or interest rate) of 4.25%. Every six months, John will receive a payment of $212.50 from the government for 10 years. At the end of the 10-year period, John will be repaid his initial investment of $10,000.

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