If you're looking for the funniest stuff, I suggest starting with the Steve, Don't Eat It Homage and then the travel category. You're on your own with the older posts that have yet to be categorized.

Friday, May 12, 2006

Bonds and Notes and Bills, Oh My

No rants today. Yesterday I decided to take today off despite the outlook of miserable weather. Lo and behold, it has been sunny all day so far. I'll let things dry up a bit from last night's rain and then go hiking or maybe play some left-handed disc golf. (Ridiculously, I have a disc golf injury that I don't want to aggravate by playing right-handed.)

Today's post is educational. It's about investing in U.S. Treasury bonds. Actually, there are bonds, notes and bills. Bonds are the longest maturities (ex. 20, 30 years). Notes are offered from 2 years to 10 years. Bills are offered for maturities of 26 weeks or less. Why they name these like this, I don't know and I don't think it matters.

I don't know all the eligibility requirements but if you're a US citizen, have a SSN and a driver's license you can open an account directly with the Treasury. (If you don't use that link [and unless you know me personally, you shouldn't], when you get to the page which asks which of three types of accounts you want to open, you want do not want to open a Legacy or H/HH account.) The account costs nothing. No fees or anything for normal use (see last paragraph).

The important stuff to know about Treasuries vs. bank CDs.
1) Interest on Treasuries is exempt from state income taxes. I don't know of any state with an income tax that exempts CD interest.
2) Treasuries can only be purchased on certain days (auction days). Generally, this is once a week or less often (4 week, 13 week and 26 week T-Bills appear to be auctioned every week, longer maturities appear less frequently, check the schedule). CDs can be purchased whenever your bank is open.
3) Treasuries can be purchased in multiples of $1000. CDs minimums are set by individual banks.

I'll use the 26-week T-bill as an example. Recent auction results show the 26-week (182 day) bill yielding about 5%. Unless there's a holiday, the auction for these generally takes place every Monday and the actual T-bill is issued on Thursday. What this means to you is that you have to put in your order (I call it an order but it's really a non-competitive bid) before the auction. (Exactly how much before I can't seem to find but the day before definitely works.) Let's say you put in an order for a $1000 26 week T-bill. The auction takes place and on the issue date (probably that Thursday) you security is issued. For the May 11 issue, the auction price was 97.558167/$100 meaning that Treasury Direct will take $975.58 out of your linked account and, in 182 days, they'll deposit $1000 back.

Lastly, just a warning, there can be quite a delay between the time you place an order and the time the security is issued. Don't forget to have the money available in your linked account come issue day. This would be in the top three classic blunders behind "Never get into a land war in Asia" and "Never get involved with a Sicilian when death is on the line." *

* - Update - "Purchase requests are rejected if funds are insufficient to cover the cost of the securities." I suspect you bank might charge you for insufficient funds, also.

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