Treasury bills: “T-bills” have the shortest maturities — 13 weeks, 26 weeks, and one year. You buy them at a discount to their $10,000 face value and receive the full $10,000 at maturity. The difference reflects the interest you earn.
Treasury notes: These mature in two to 10 years. Interest is paid semiannually at a fixed rate. Minimum investment: $1,000 or $5,000, depending on maturity.
Treasury bonds: These have the longest maturities at 10 years. As with Treasury notes, they pay interest semiannually, and are sold in denominations of $1,000.
Zero-coupon bonds: Also known as “strips” or “zeros,” these are Treasury-based securities that are sold by brokers at a deep discount and redeemed at full face value when they mature in six months to 30 years. Although you don’t actually receive your interest until the bond matures, you must pay taxes each year on the “phantom interest” that you earn (it’s based on the bond’s market value, which usually rises steadily during the time you hold it). For that reason, they are best held in tax-deferred accounts. Because they pay no coupon, zeros can be highly volatile in price.
Inflation-indexed Treasuries: These pay a real rate of interest on a principal amount that rises or falls with the consumer price index. You don’t collect the inflation adjustment to your principal until the bond matures or you sell it, but you owe federal income tax on that phantom amount each year — in addition to tax on the interest you receive currently. Like zeros, inflation bonds are best held in tax-deferred accounts.
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