Legal Definitions - treasury bond

A Treasury bond, often abbreviated as a T-bond, is a type of long-term debt security issued and guaranteed by the U.S. federal government. When you purchase a Treasury bond, you are essentially lending money to the government for an extended period, typically 20 or 30 years. In return for this loan, the government promises to pay you regular interest payments, usually every six months, and to return your original investment (the "face value") when the bond reaches its maturity date.

Treasury bonds are widely regarded as one of the safest investments available globally because they are backed by the full faith and credit of the U.S. government. Due to this extremely low risk, they generally offer lower interest rates compared to other investments that carry higher levels of risk. Investors often choose Treasury bonds for their stability and predictability, especially when seeking to preserve capital over the long term.

• Example 1: Individual Retirement Planning

  Sarah is planning for her retirement, which is 25 years away. She has a portion of her savings that she wants to invest very conservatively to ensure capital preservation and steady income, even if the returns are modest. Sarah decides to purchase a 25-year Treasury bond.

  This illustrates a Treasury bond because she is lending money to the U.S. government for a long duration (25 years), prioritizing the safety of her principal and guaranteed semi-annual interest payments over potentially higher but riskier returns from other investments. When the bond matures, she will receive her initial investment back, providing a secure component to her retirement portfolio.

• Example 2: Institutional Investment by a Pension Fund

  The Evergreen Pension Fund manages retirement savings for thousands of public sector employees. The fund's primary objective is to ensure the long-term solvency and stability of its assets, guaranteeing payouts to retirees for decades to come.

  To meet its long-term liabilities and minimize risk, the Evergreen Pension Fund allocates a significant portion of its portfolio to 30-year Treasury bonds. This demonstrates the use of Treasury bonds by a large institutional investor seeking extremely safe, long-duration assets that provide predictable income streams and capital preservation, aligning with the fund's commitment to secure future payments for its beneficiaries.

• Example 3: Trust for Future Education Expenses

  Mr. and Mrs. Chen establish a trust fund for their newborn grandchild's college education, which will be needed in about 18 years. They want to ensure the money grows safely and is available when the time comes, without exposing it to significant market fluctuations.

  The trustee, following the Chens' conservative investment instructions, invests a substantial part of the trust's principal into 20-year Treasury bonds. This is an example of a Treasury bond because it represents a long-term, low-risk investment with guaranteed returns and principal repayment, perfectly suited for a trust fund where the primary goal is to preserve the capital and ensure its availability for a specific future purpose, such as college tuition, without taking on undue risk.