Bond Investment Basics: U.S. Treasury Bonds


Bonds, especially U.S. Treasury Bonds, comprise a mainstay holding, along with stocks, cash equivalents and real estate, for many investors. But just what are bonds, and how do they differ from stocks? Let’s take a deeper look. 
 
Bonds are essentially IOU’s. The Issuer of the bond promises to give the entire principal investment back to the investor after a specified period of time, ranging from less than a year to up to 30 years. The bond issuer pays the investor periodic dividend income for the privilege of using the investor’s money. Many investors count on this periodic income to fund their expenses. 
 
Different government and corporate entities issue bonds. Because not all issuers are as creditworthy than others, bonds are independently rated regarding their safety. The United States government is a big issuer of bonds. Because the risk of government default is so low, U.S. Treasury bonds carry a high safety rating. 
 
There are several ways to invest in Treasuries. The simplest way is to buy individual bonds directly from the federal government, collect semi-annual dividends, and hold the bonds until they mature, at which time you’ll get your full investment back. Many investors buy bond mutual funds, where individuals participate in professionally managed portfolios of bonds. Be aware that if you invest in bond mutual funds, there is no guarantee that you’ll get your exact investment back. You may get more or less in return, depending largely on the trajectory of interest rates while you hold the bond fund.