What is a Treasury Bond?

A treasury bond is an interest-bearing debt security that is issued by the United States government. It has the following characteristics:

Maturity. A treasury bond matures over a period of more than 20 years.
Interest rate. The interest rate associated with a treasury bond is fixed.
Interest payments. Interest payments are made to investors at six-month intervals.
Purchase method. Treasury bonds may be purchased at auction from the government, or from a bank or broker.
Taxation. The interest earned on treasury bonds is taxed at the federal level, but is exempt from taxation at the state and local levels.

Example of a Treasury Bond

A U.S. Treasury bond is issued on January 1, 2025, with a maturity date of January 1, 2045. Its face value is $1,000, and its coupon rate is 4% annually. Interest payments are semi-annual. An investor buys the bond for $1,000 on the issue date. The 4% annual coupon rate means the bond pays $40 per year in interest. Since Treasury bonds pay interest semiannually, the investor receives $20 every six months. On January 1, 2045, the U.S. government repays the $1,000 face value to the bondholder. The investor’s total earnings over 20 years are $800 in interest payments (calculated as $40/per year x 20 years), and a $1,000 principal repayment. This results in a total of $1,800 received over the life of the bond.

Treasury Bond Risk

Since treasury bonds are issued by the United States government, which can raise taxes to ensure that its bonds are paid, treasury bonds are assumed to be risk-free. For this reason, many investors that want to minimize risk are willing to purchase them.