Page 463 - Encyclopedia of Business and Finance

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Investments

gov)—a government Web site that is run by the Bureau of months. A fourth hybrid bond is a Treasury inflation-pro-
the Public Debt, part of the U.S. Department of the Trea- tected security, which provides protection against inflation
sury—where the amount invested and what is paid differs based on the Consumer Price Index and is sold in terms
from the paper EE bond just described. of five, ten, and twenty years.
Another type of savings bond is the I bond; it is sold
at face value and will grow with inflation-indexed earnings ZERO COUPON BONDS
for up to thirty years. The I bond can also be purchased Is there an instrument that lets an investor know exactly
online at TreasuryDirect. how much money will be available at a particular future
There are advantages that both of these bonds pos- date (whether it be for the education of one’s child, retire-
sess: ment, etc.) and, if administered correctly, becomes tax
deferred or even tax-exempt? Yes, the zero coupon bond
• Competitive: Their rates of return are generally meets these expectations.
comparable to other forms of savings and accrue
Zero coupon bonds have some advantages over other
interest monthly and compound semiannually.
types of long-term investments. They have become an
• Safe: They are backed by the full faith of the United excellent choice for individual retirement accounts,
States and are registered, which is helpful if bonds 401(k) plans, Keogh plans, and other pension funds, and
are lost, stolen or mutilated. most certainly for a child’s college savings. They are there-
• Convenient: Bonds may be purchased at banks, fore an ideal investment for investors who are more con-
online at TreasuryDirect, or where one works, if cerned about “outcome” rather than “income.”
one’s employer has such a deduction plan. Bonds are debt obligations issued by a corporation or
by a federal, state, or local government agency. When one
• Accessible: They are easily redeemable after six
buys a bond (usually at face value), one is buying a prom-
months.
ise from the issuing institution to pay the amount of the
• Tax benefits: The interest earned on savings bonds is face value of the bond at maturity.
exempt from all state and local income tax and is Zero coupon bonds are sold at a price well below face
deferred for federal income tax until sale or maturity.
value. Thus, these bonds are appealing to the small
investor because they can be bought far more cheaply than
TREASURIES ordinary debt obligations. The discount is usually from 50
Treasuries refers to a range of U.S. Treasury obligations. In to 75 percent.
a low-interest economy, many people switch to invest-
ments with higher yields, getting away from their tradi- SUMMARY
tional CDs. A safe and secure short-term investment that
The variety of investments available provides varying
is an alternative for the CD is the Treasury bill (T-bill). advantages and disadvantages. A careful study of the dif-
Longer-term notes and bonds are also available.
ferent types in consideration of goals for investment and
Treasury obligations are tax-exempt at the state and level of risk to be accepted is worthwhile. Such study pro-
local levels and are backed by “the full faith and credit” of vides the investor the basis for making decisions about the
the United States. The credit risk involved in this form of extent and nature of variability wanted in one’s personal
investment is considered practically nil. In comparison portfolio.
with similar obligations issued by corporations, Treasury
SEE ALSO Bonds; Financial Literacy; Mutual Funds;
obligations usually pay a yield, which is one or two per-
Stocks
centage points lower. Many people, however, are willing
to accept the slightly lower yield in exchange for the high
level of safety. BIBLIOGRAPHY
There are four types of issues of Treasuries, which Graham, B., and Zweig, J. (2003). The intelligent investor. New
York: HarperCollins.
each require a minimum investment of $1,000. These are
tax-free at state and local levels and can be bought through Kiplinger’s practical guide to your money (3rd ed.). (2005).
Chicago: Dearborn.
a broker, bank, or the Treasury. The T-bill is a thirteen- or
Lange, J. (2006). Retire secure. Winchester, VA: Oakhill Press.
twenty-six-week instrument that is issued at a discount
Tyson, Eric (2005). Investment for dummies (4th ed.). New York:
but pays face value at maturity. Treasury notes earn and
Wiley.
pay a fixed rate of interest every six months and are issued
in terms of two, three, five, and ten years. Treasury bonds
are sold at thirty-year maturities and pay interest every six Joel Lerner

440 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION