There are United States Treasury bonds that range from less than a year to more than 10 years, however, the terms are not the only difference to consider when deciding which one to invest in.
The United States Treasury bonds are one of the safest investments in which anyone could put their money. These bonds are a type of loan that individuals give to the federal government to help them finance their government programs and projects. There are two types: short-term and long-term bonds. What is the difference, beyond the duration time?
Treasury bonds pay interest semiannually, and when the bond matures, the face value of the bond is repaid to the owner. Short-term bonds are typically those that mature in three years or less from purchase; medium-term bonds mature between three and 10 years and long-term bonds are those that mature more than 10 years.
The obvious difference between each of these bonds is the length of time before maturity, but it is not the only one. Another intrinsic point of difference between short-term bonds and long-term bonds is the type of risk that the investor acquires.
Although long-term Treasury bonds have higher growth potential than short-term bonds, they are also more exposed to price risk and fluctuating interest rates. Because the money invested in the bond is tied up for a longer period of time, there is a greater chance that interest rates will change significantly at some point during the term of the bond.
In this sense, short-term bonds are less subject to the volatility of interest rates, they may also lose opportunity for growth. When these bonds mature, investors can reinvest their money: if rates fell by then, the potential return will be lower; but if rates go up, they would be in their favor.
According to some investors, the risk of falling interest rates can be more easily recovered by holding long-term bonds to maturity.
Another difference is that Treasury bonds maturing in one year or less do not pay you any interest. These bonds, also known as Treasury bills or T-bills, are purchased at a price discounted from their face value. The gain is that, at maturity, this bond is sold at full face value. Its advantage and disadvantage at the same time is that you know exactly how much you will receive when your bonus expires.
It is important that investors take into account these characteristics in each of the bonds to choose the one that best suits them. If you think you’ll need the money, short-term bonds may suit you; but if you are sure that this money will not be withdrawn in the future, it may be convenient for you to buy bonds of 10 to 30 years duration.
They are also very useful for planned expenses, such as a child’s university or the purchase of a house, so you can program the bonus to expire on the date you want to withdraw the funds. Thus, not only do you have your money available at the time you want, you could also have an estimate of how much money you will receive for that time.