One of the safest, most stable investment vehicles is the bond, which comes in several different financial varieties – all with different risk levels.  A bond acknowledges that the issuer has borrowed money, and therefore, has the obligation to repay it to the holder of the bond at a certain interest rate over a time period that is predetermined.  
The interest, or yield, of a bond is a percentage of the face value of the bond.  If you hold a $5,000 bond that has an 8% yield, it will pay $400 in interest per year.  Some bonds pay interest in semi-yearly payments, while others will only be paid out at maturity.  The longer maturities will generally mean higher yields for the investor.  Bond prices tend to move contrary to interest rates; when interest rates rise, the prices of bonds decrease, and when interest rates go down, the bond prices increases.

The financial ingredients of bonds

The value and risk of each bond is contingent upon the terms of the instrument.  Finding the right bond for your portfolio means selecting the right financial ingredients:

• Coupon yield / interest rate
  
• Credit rating
  
• Time between purchase and maturity date
  
• Taxation levels for interest income
  
• The option for the bond to be callable at particular dates, or prepared before maturity

All of these factors impact the price, return, and financial worthiness of the bond for your portfolio.  

Treasury bonds

U.S. government bonds may be offered by the Treasury or other government agencies.  Because these bonds are backed by the credit of the federal government, they are considered to be “risk free.”  

U.S. Treasury bills mature in 90 days to one year, U.S. Treasury notes mature in one to ten years, and U.S. Treasury bonds will mature in ten to thirty years.  Within these different treasury securities are several different types of bonds, which are generally intended to fund different expenditures, such as education or other Federal programs.

The interest earned from Federal bonds will be subject to federal income tax, but is exempt from most state income taxes.

Municipal bonds

Municipal bonds are issued by the state or local government, usually to help fund civic projects like highways, schools, or recreational facilities.

Municipal bonds generally pay less interest than treasury or corporate bonds, but the interest income is often exempt from federal income tax, as well as some state and local taxes.  Therefore, in the long run, a lower yield municipal bond may pay you more than a higher yield bond, once you calculate the benefits of triple-tax benefits.

Corporate bonds

Corporate bonds are written by businesses in order to fund long-term capital projects or to provide working capital.  If you are deciding whether or not the bond is a worthwhile investment, there are rating services that will evaluate the credit worthiness of the issuing company.  Bonds with AAA ratings are the safest, with D ratings signifying a high risk or potential default bond.

Interest rates of corporate bonds are generally greater than government issues. The higher the quality of the bond, the lower the interest rate, as there is less risk to the investor.  In addition, corporate bonds are not exempt from any taxation.

Financial returns on bonds

There are several reasons why bonds can be a colorful, profitable addition to your portfolio.  While they may not offer the excitement that trading stocks can, but bonds are a solid, dependable income source.

If you compare stocks and bonds, bonds represent debt and stocks represent equity.  Usually, it is safer to invest in debt than it is to invest in equity.  This is because many debt holders have priorities over shareholders.  Therefore, if a company takes a nosedive and declares bankruptcy, the debt holders typically get paid first while shareholders may lose all of their money.

In addition, treasury bonds are considered to be risk free, unlike stocks or options.  If you want to guarantee that your money is safe, then treasury bonds are a great investment.  However, as the risk-to-reward ratio dictates; low risk results in smaller returns.  In the long run, stocks will outperform bonds; however, during slumps in the stock market, bonds will outperform equities.  Having both in your portfolio can help you gain profits, regardless of market direction.

If you have time to wait for your investment returns, then bonds will provide you with the most profit at the lowest amount of risk.  As bonds provide higher interest rates than savings accounts, they are an excellent long-term investment tool that can help you achieve certain financial goals, such as retirement wealth.

Treasury bonds and notes

The wide range of available investment options provides many paths to wealth and security. For an investor looking for stable growth with minimal risk, investing in treasury bonds and notes is an excellent strategy.  
A treasury security is issued by the United States Department of the Treasury in the form of a government bond. These are a type of debt financing instrument that is traded quite frequently on the secondary market. Treasury bonds come in several flavors to suit your investment horizon.

Treasury bills

Treasury bills or T-bills are short term treasury securities with terms of 3 or 6 months. T-bills are purchased at a discount to their face value with principal and interest redeemed at maturity. For example, if you bought a 91 day (3 month) $10,000 T-bill with a 3% discount rate, you would pay approximately $9,925 today and receive $10,000 in three months. The $75 would represent the interest earned on the T-bill. T-bills are used as short-term investments.

Treasury notes

A treasury note has a maturity period that ranges from 24 months to a maximum length of 10 years.  This type of saving instrument pays interest twice a year. The interest on a treasury note or a bond is paid every six months, either deposited into a bank account or via check sent in the mail.   

reasury notes are used as a risk-free investment to balance the risk profile of a portfolio. Before its popularity grew on the secondary markets, treasury notes were used by grandparents as gifts to their grandchildren because of the safety aspect and the terms until maturity.

Treasury bonds

A treasury bond has a term of up to thirty years. Much like a treasury note, a treasury bond earns a payment twice a year.  In recent years, treasury bonds at a ten year maturity rate have become very popular.  In fact, there is actually a global demand for treasury bonds, with some countries even offering bonds that mature in fifty years.

The security of a Treasury security

In comparison to most other financial instruments, an investor can obtain a high amount of security with a Treasury note or bond.  Unlike other private offerings, the United States government has an obligation to pay out on treasury securities.  In fact, treasury bonds and notes are considered to be the most secure investment that you can make. However, as we will see, the more secure an investment (less risk), the lower the return.

A treasury security will mature at its face value designated at the time of purchase, but the interim valuation can fluctuate depending upon the market rate of interest.  Therefore, if you sell a treasury bond or note before it has reached its maturity date, the selling price is dependent upon the current interest rates.  You can either sell the treasury security for more or less than your original purchase price. 

The tax status of a Treasury security

Federal income tax must be paid on the interest income from all treasury bonds and notes, but these securities are 100% exempt from most state income taxes, although there may be tax due if the bond is sold at a premium to its purchase price.  When you purchase a Treasury bond or note, you may want to inquire as to your specific state tax exemption.  If your state offers tax exemption on treasury securities, then it further increases the value of your return.

A treasury bill, bond or note is a safe, secure investment that will provide you with consistent payments twice annually.  In addition, depending upon the market rate, you can also obtain additional returns by trading your treasury securities on the secondary market.   As a part of your overall portfolio, treasury securities are great financial instruments that provide you with regular income and very minimal risk.