Bonds and Treasury Basics — In Plain Words

What a bond is — Investor.gov’s words

Investor.gov’s “Bonds” page says: “A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.”

A debt security is a security that stands for money that was loaned and must be repaid. That gloss follows FINRA’s wording for “Debt Security”: “A debt security is any security that represents loaned money that must be repaid to the lender.”

Investor.gov’s “Bonds” page says: “When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it ‘matures,’ or comes due after a set period of time.”

The issuer is the one who issues the bond — the borrower in Investor.gov’s wording above. Principal, face value, and par value are the names Investor.gov gives for the amount to be repaid. Matures means comes due, in Investor.gov’s wording above.

What a bond is — FINRA’s words, printed separately

FINRA’s “Bond Investing and Due Diligence” page says: “When you buy a bond, you’re loaning money to the bond’s issuer—which could be a corporation, a local municipality, a government agency or the federal government—with the intention of receiving back your initial investment and, in most cases, interest.”

Note the hedge in FINRA’s wording: “in most cases, interest.” Investor.gov’s “Bonds” page, printed above, words the interest part as a promise to pay a specified rate of interest during the life of the bond. The two wordings are printed separately here. They are not merged into one rule on this page.

FINRA’s “Bonds” glossary page says the owner of a bond is known as a bondholder, and that a bondholder is typically entitled to regular interest payments as due and return of principal when the bond matures.

What a corporate bond is — Investor.gov’s words

This section is about company bonds only. It is not a description of Treasury securities.

Investor.gov’s “What Are Corporate Bonds?” bulletin says: “A bond is a debt obligation, like an IOU. Investors who buy corporate bonds are lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due, or matures.”

Note the hedge in that bulletin’s wording: “in most cases, to return the principal.”

Investor.gov’s “Bonds, Corporate” page says corporate bonds are bonds issued by companies, and that companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business.

The same “Bonds, Corporate” page says: “With a bond, the company promises to return the face value of the bond, also known as principal, on a specified maturity date. Until that date, the company usually pays you a stated rate of interest, generally semiannually.” Semiannually means every six months. The page adds that a corporate bond does not give you an ownership interest in the company — unlike when you purchase the company’s stock.

The “What Are Corporate Bonds?” bulletin makes the same stock point in its own words: when you buy a share of common stock, you own equity in the company; when you buy a corporate bond, you do not own equity in the company, and you will receive only the interest and principal on the bond.

Parts of a bond, in the sources’ words

Face value / par value. FINRA’s “Bonds” page says: “The amount the issuer must pay to the bondholder at maturity is its face value, also known as par value.” FINRA also says par value is an amount equal to the nominal or face value of a security.

Maturity date. FINRA’s “Bonds” page says: “A maturity date is the date when the principal amount of a bond, note or other debt instrument is typically repaid to the investor along with the final interest payment.”

Coupon. FINRA’s “Bonds” page says: “A coupon, also called the coupon rate, is the interest payment made on a bond, usually paid twice a year.” FINRA adds that bonds that pay no interest are said to have a “zero coupon.” This page prints no coupon amount and no coupon rate figure, because no figure is needed to explain what the word means.

Yield. FINRA’s “Bonds” page says: “Yield is the return earned on a bond, expressed as an annual percentage rate.” This page prints no yield figure for any bond or Treasury security.

Risks the sources name

Investor.gov’s “What Are Corporate Bonds?” bulletin says: “Like all investments, bonds carry risks. One key risk to a bondholder is that the company may fail to make timely payments of interest or principal.” The bulletin says that if that happens, the company will default on its bonds, and it calls this “default risk.”

FINRA’s “Bond Investing and Due Diligence” page says it this way: “One of the primary risks of investing in bonds is the risk of the issuer failing to fulfill its obligation to pay the interest payments or the principal as agreed, also known as a default.” FINRA says a default could cause you to lose all or a substantial part of your investment, and that, generally, the lower the credit rating, the higher the risk of default.

FINRA’s same page lists characteristics to assess before buying a bond: maturity, security provisions, yield, call status, tax treatment and credit rating. FINRA says performing this due diligence will allow you to better gauge the likelihood of timely interest payments, principal repayment and overall suitability with your investing needs. Due diligence here means checking those characteristics before buying, in FINRA’s use of the term on that page.

FINRA’s same page also says bond prices and interest rates have an inverse relationship. Inverse means they move in opposite directions, as FINRA words it on that page in its discussion of monitoring financial markets.

Treasury securities — TreasuryDirect’s words

TreasuryDirect’s “FAQs About Treasury Marketable Securities” page says: “U.S. Treasury Securities are debt instruments. The U.S. Department of the Treasury issues Securities to raise the money needed to operate the federal government.”

TreasuryDirect’s “About Treasury Marketable Securities” page says: “The federal government finances its operation in part by selling various types of securities. All these securities are backed by the full faith and credit of the United States government.”

FINRA’s “Bonds” page words “full faith and credit” this way: Treasurys, savings bonds and debt securities issued by federal agencies are backed by the “full faith and credit” of the U.S. government, which is a promise by the U.S. government to pay all interest when due and redeem bonds at maturity.

TreasuryDirect’s FAQ page lists what it sells to individual investors in these words: “We sell Treasury Bills, Notes, Bonds, TIPS, FRNs, and U.S. Savings Bonds to individual investors.” FRNs are Floating Rate Notes. Savings Bonds are covered separately below, because TreasuryDirect’s pages treat them as different from the marketable family.

The Treasury marketable family

TreasuryDirect’s FAQ page says Treasury Bills, Notes, Bonds, TIPS, and FRNs are transferable, so you can buy or sell them in the secondary market, unlike Savings Bonds. The secondary market is the market where securities are bought and sold after their original issuance, in FINRA’s wording for “Secondary Market” on its “Bonds” page.

TreasuryDirect’s FAQ page says you can buy Treasury Bills, Notes, Bonds, TIPS, or FRNs at one of the auctions it conducts, or in the secondary market.

Treasury Bills

TreasuryDirect’s “About Treasury Marketable Securities” page says: “Treasury Bills are short-term securities with five term options, from 4 weeks up to 52 weeks. Bills are sold at face value or at a discount from the face value. When they mature, you’re paid the face value.” A discount here means sold below face value, following TreasuryDirect’s wording “at a discount from the face value” on that page.

FINRA’s “Bonds” page words Treasury bills differently. See the “Where the sources differ” box below. The two wordings are not merged on this page.

Treasury Notes

TreasuryDirect’s “About Treasury Marketable Securities” page says: “Treasury Notes are government securities which are issued with maturities of 2, 3, 5, 7, and 10 years. Notes pay interest every six months.”

FINRA’s “Bonds” page says a Treasury note is a medium-term debt security issued by the U.S. government with a maturity of two to 10 years. FINRA’s “Note” entry on the same page also says Treasury notes are issued in maturities of two, three, five, seven, and 10 years.

Treasury Bonds

TreasuryDirect’s “About Treasury Marketable Securities” page says: “Treasury Bonds (different from U.S. Savings Bonds) pay interest every six months. Historically a 30-year investment, Treasury Bonds are now offered in 20-year terms, as well.”

FINRA’s “Bonds” page says: “A Treasury bond is a long-term debt security issued by the U.S. government with a maturity of 20 or 30 years, paying a fixed interest rate semiannually.”

Treasury Inflation-Protected Securities — TIPS

TIPS stands for Treasury Inflation-Protected Securities.

TreasuryDirect’s “About Treasury Marketable Securities” page says: “TIPS are Treasury marketable securities whose principal is adjusted by changes in the Consumer Price Index. TIPS pay interest every six months and are issued in terms of 5, 10, and 30 years.” The Consumer Price Index is named on that page as the index TIPS principal is adjusted by. This page does not explain that index further, because the TreasuryDirect page read for this page does not explain it further.

FINRA’s “Bonds” page words TIPS differently. See the “Where the sources differ” box below.

Floating Rate Notes — FRNs

TreasuryDirect lists FRNs in the same marketable family. Its “About Treasury Marketable Securities” page says interest payments on an FRN rise and fall based on the discount rates for 13-week Treasury bills, that FRNs are only issued for a term of two years, and that they pay interest quarterly — every three months, in TreasuryDirect’s wording on that page.

This page’s main topic is bills, notes, bonds, and TIPS. FRNs are named here only because TreasuryDirect lists them in the same family on the pages read for this page.

Savings Bonds are different — the sources’ words

TreasuryDirect’s “About Treasury Marketable Securities” page says you can also buy non-marketable U.S. savings bonds from the United States Treasury, and that they are not marketable because each is registered to one person’s social security number, so you cannot sell them or transfer them to someone else.

Investor.gov’s “Savings Bonds” page says: “Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs.”

This page does not cover savings bond purchase limits, redemption rules, or tax treatment. Those details are on the Investor.gov and TreasuryDirect pages themselves, not summarised here.

How the sources word Treasury safety — each wording separate

TreasuryDirect’s FAQ page answers “Why should I buy a Treasury security?” in these words: “Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time. Also, most Treasury securities are liquid, which means they can easily be sold for cash.” That is TreasuryDirect’s wording, about Treasury securities. Liquid here is used in TreasuryDirect’s sense on that page: can easily be sold for cash.

FINRA’s “Bond Investing and Due Diligence” page says: “Certain bonds—notably U.S. Treasury securities—are generally considered low risk since they’re backed by the U.S. government. But this low risk status doesn’t apply to other bonds.” That is FINRA’s wording, with its hedge “generally considered.”

Investor.gov’s “Savings Bonds” page says U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. That wording is about savings bonds, on that page. It is not printed here as a wording about bills, notes, bonds, or TIPS.

The three wordings above are printed separately. They use different words — “safe and secure,” “generally considered low risk,” and “one of the safest” — and they are about different securities in their own pages. This page does not merge them into one safety claim.

What this page does not cover

This page prints no yield figure and no price figure for any bond or Treasury security. The anchors give definitions of yield, coupon, premium, and discount, and those definitions are printed above with their sources. No current rate, yield, or price is stated on this page, because none of the pages read in full gives a current figure that this page needs to explain the basics.

This page gives no worked example with money amounts. The anchors do contain examples with money amounts in their own pages. Those examples are not copied here, so this page contains no money-amount example at all.

This page does not cover how to open an account, how to bid at an auction step by step, purchase minimums, or purchase limits. TreasuryDirect’s FAQ page does state a minimum and bidding rules on its own page. Those figures and rules are not printed here. Read TreasuryDirect’s page directly for them.

This page does not cover tax treatment beyond naming it as one of the characteristics FINRA lists to assess. It does not cover bond funds, municipal bonds in detail, agency securities in detail, STRIPS in detail, credit ratings in detail, or selling a bond before maturity in detail. The anchors touch on some of those topics on their own pages. They are outside the basics explained here.

This page does not say which bond or Treasury security, if any, fits any reader. It gives no recommendation.

TreasuryDirect’s “About Treasury Marketable Securities” page, as read for this page, does not explain the Consumer Price Index beyond naming it for TIPS. This page therefore does not explain that index.

Words to know

Bond: Investor.gov’s words are “a debt security, similar to an IOU.”

Bondholder: FINRA says the owner of a bond is known as a bondholder.

Coupon / coupon rate: FINRA says a coupon, also called the coupon rate, is the interest payment made on a bond, usually paid twice a year.

Debt security: FINRA says a debt security is any security that represents loaned money that must be repaid to the lender.

Face value / par value: FINRA says the amount the issuer must pay to the bondholder at maturity is its face value, also known as par value.

Full faith and credit: FINRA words this as a promise by the U.S. government to pay all interest when due and redeem bonds at maturity, for the securities FINRA names in that entry.

Issuer: The borrower who issues the bond, following Investor.gov’s “Bonds” passage printed above.

Maturity date: FINRA says a maturity date is the date when the principal amount of a bond, note or other debt instrument is typically repaid to the investor along with the final interest payment.

Principal: Investor.gov’s “Bonds” page uses principal as another name for face value or par value, to be repaid when the bond matures.

TIPS: Treasury Inflation-Protected Securities. TreasuryDirect says TIPS principal is adjusted by changes in the Consumer Price Index, TIPS pay interest every six months, and TIPS are issued in terms of 5, 10, and 30 years.

Treasury Bills: TreasuryDirect says Treasury Bills are short-term securities, sold at face value or at a discount from face value, and paid at face value when they mature. See the differences box for the term wordings.

Treasury Bonds: TreasuryDirect says Treasury Bonds pay interest every six months, and are different from U.S. Savings Bonds.

Treasury Notes: TreasuryDirect says Treasury Notes are issued with maturities of 2, 3, 5, 7, and 10 years, and pay interest every six months.

Yield: FINRA says yield is the return earned on a bond, expressed as an annual percentage rate.

This page is general information only. It is not financial advice.

Only the source agencies can speak to a specific security or to your own case. This page decides nothing and recommends nothing.