• Often referred to as “Treasuries” since they are issued by the United States Treasury Department.
• There are three types of Treasuries—Bills, Notes, and Bonds.
• Treasury Bills:
- Bills are a loan from the investor to the federal government.
- Bills are sold at a discount and mature at their face value.
- All interest is credited at maturity.
- Minimum investment is $10,000 and sold in increments of $5,000.
- Maturities are 3 months, 6 months, or 1 year.
- The Treasury holds weekly auctions on Mondays.
* from “The Wall Street Journal Guide to Understanding Money & Investing”
• Treasury Notes and Bonds:
- Notes and Bonds are a loan from the investor to the federal government.
- Notes and Bonds have a fixed interest rate and a fixed maturity date.
- They typically pay interest every 6 months (does not include zero coupon treasury bonds, discussed in another section of guide).
- Notes and Bonds are sold in increments of $5,000.
- Notes can range in maturity from 1 to 10 years.
- Bonds can range in maturity from 10 to 30 years.
• All Treasuries are non-callable.
• The U.S Govt guarantees all Treasuries for principal & interest.
• All Treasuries are book entry only.
Tax Considerations
• Treasuries are subject to federal income tax, but free from state income tax.
• Income is taxed in the year earned/credited.
Market Values
• There is a general relationship between market values and interest rates. If interest rates increase, values go down. If interest rates decrease, values go up. Treasuries are highly sensitive to changes in interest rates. Because they are often perceived to have no risk of default (credit risk), their market value is primarily determined by changes in interest rates.
• The longer the maturity, the more substantial the change in value for a given change in interest rates.
Government Agency Securities
Many government agencies issue securities. These agencies include Government National Mortgage Association (Ginnie Mae or GNMA), Federal National Mortgage Association (Fannie Mae or FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC), Federal Home Loan Banks (FHLB), Federal Land Banks (FLB) and others. The most common types of agency securities we offer are GinnieMae and Fannie Mae so this section will address those securities.
General Investment Features – GNMA and FNMA
• These securities are typically sold in one of two forms.
1. Mortgage-backed notes and bonds
2. Mortgage pass-through securities
• Mortgage pass-through securities are pools of mortgages packaged by the agency and sold to the investor.
• Just as a homeowner makes monthly mortgage payments that return principal and interest, the mortgage pass-through securities return principal and interest to the investor on a monthly basis.
• Mortgage pass-through securities have a minimum investment of $25,000.
• Mortgage pass-through securities have no specific maturity date. The return of principal depends on how quickly the mortgages in the pool are paid off.
The typical holding period can be from 8-15 years.
• While agency bonds are not guaranteed, they enjoy “Implied” full faith and credit of the U.S. Government except for GNMA, which do have actual backing of full faith, & credit.
Tax Considerations
• Agency securities interest is subject to federal income tax.
• Agency securities interest is not subject to state and local income tax.
Market Values
• Mortgage–backed bonds are valued the same way as Government Treasury Bonds. Please refer to that section for information.
• Mortgage pass-through securities do not have a par value since they return principal as it is received from the mortgages.
• The market values of pass-throughs will have a direct correlation between the interest rates and the time remaining on the mortgages in the pool. Passthrough securities are sensitive to changes in interest rates because homeowners often refinance their mortgages if rates decline (pre-payment risk) and may tend to hold their mortgages longer if rates rise (extension risk).
To compensate the investor for these additional risks, pass-through securities often offer a yield advantage over comparable Treasury securities.
Municipal Bonds
General Investment Features
• Bonds are a loan from the investor to the municipality.
• Bonds have a fixed interest rate and a fixed maturity date.
• They typically pay interest every 6 months (does not include zero coupon bonds, discussed in another section of guide).
• Bonds are sold in increments of $5,000.
• Bonds can range in maturity from 1 to 30 years.
Two types of Bonds
• General Obligation Bonds (GO)—These bonds are backed by the full faith and credit of the taxing authority that issues the bonds.
• Revenue Bonds—These bonds are paid back through the revenues generated from the particular project, such as a toll road.
Tax Considerations
• Local governments—states, counties, and cities, issue Municipal Bonds.
Because of this, the Federal Government does not impose any federal tax on the income for most types of municipal bonds.
• There are some exceptions to the federal taxation rules in the case of some industrial use bonds. If the client is subject to the Alternative Minimum Tax (AMT), these bonds could be taxable to them. The client should discuss their tax status with a qualified tax advisor.
• If a bond is issued from the resident state of the owner, it may also be exempt from state income tax (if applicable). However, this is not always the case.
Be sure you and your customer understand the complete tax ramifications of any bond you are recommending.
• If sold prior to maturity, capital gain/loss taxes must be understood.
Market Values
There is a general relationship between bond market values and interest rates. If interest rates increase, bond values go down. If interest rates decrease, bond values go up. The credit rating of the municipality can also affect market value of a municipal bond.
Corporate Bonds
General Investment Features
• Bonds are a loan from the investor to the corporation.
• Bonds have a fixed interest rate and a fixed maturity date.
• Bonds typically pay interest every 6 months (does not include zero coupon bonds).
• Bonds are sold in increments of $5,000, generally referred to as 5-bond rule.
• Bonds can range in maturity from 1 to 30 years.
Tax Considerations
• Income and capital gains on corporate bonds are subject to both federal and state income tax.
Market Values
• There is a general relationship between bond market values and interest rates. If interest rates increase, bond values go down. If interest rates decrease, bond values go up.
• Corporate Bond prices/value react both to changes in interest rates and to the creditworthiness of the company.
• Price/value is also affected by swings in the bond market.
Information here is not intended to be tax advice please see your tax advisor for any specific tax questions.
Registered Representative of, and securities, advisory services and insurance products through INVEST Financial Corporation (INVEST), member FINRA /SIPC, a registered investment advisor and affiliated insurance agencies. INVEST is not affiliated with Mayo-Vera Financial Advising.
This website may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting, or tax advice. You may wish to consult an attorney, tax advisor, or accountant regarding your specific situation. No representations are made as to the accuracy of the information contained herein or any information contained in any link provided herein.
