Definition of Bonds

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.

OR
It is a contractual agreement by the borrower to pay the holder of fixed dollar amounts at regular intervals (interest and principal payments) until a specified maturity date, when final payment is made.

A BOND

TYPES OF BONDS
Treasury Bonds
A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest

payments semi-annually and the income that holders receive is

only taxed at the federal level.

 The final payment is made at maturity. Bonds have either short-term, long term or intermediate maturity.
Short term Maturity = less than 1 year. Intermediate Maturity = between 1 to 10 years Long term maturity = 10 years or more

 The coupon interest rate the issuer must pay. Coupon interest rate does not fluctuate with market interest rates. If the repayment is not made the holder has claim over the issuers assets.

Difference Between Treasury Notes & Treasury bonds:

Both Treasury Notes and Treasury Bonds are issued by Federal Government. They Both are Issues to finance the national debt The have a only DIFFERENCE of maturity. Notes have maturity of 1 to 10 years. While bonds have maturity of 10 to 30 years.

 Both T-Notes and T-Bonds are issued by Federal Government and are free of Default Risk, as the government always print money to pay off the debt if necessary. However, Some percentage of Risk still exists.

TREASURY BONDS INTEREST RATES

Low interest rate because of no default risk. Investors get less earning then the Rate of Inflation. Sometimes the interest rate on the T-notes & T-bonds is more than the money market securities because of Interest-rate risk.

Two important factors

Rate of Return on short term bills is below 20-year bonds. Short term rates are more volatile than long term rates.

TREASURY INFLATION PROTECTED SECURITIES (TIPS)

Treasury department started offering in 1979 in order to protect investors from the negative effects of inflation.

TIPS par value rises with inflation.

TIPS have an interest rate that does not change throughout the holding of security. Principal amount changes on consumer price index.

 Retirees can opt for such securities because they contain low-risk portfolio.

TREASURY STRIPS
STRIPS is an acronym for 'separate trading of registered interest and principal securities'.

Treasury department started issuing Treasury STRIPS in 1985 apart from bonds, notes and bills.

What Are treasury strips?

Treasury STRIPS are fixed-income securities sold at a

significant discount to face value and offer no interest

payments because they mature at par. The Treasury disaggregates the individual cash flows into separate securities.

 Hence Each payment becomes a separate zero-coupon security. Each component has its own identifying number and can be

traded separately.
For example, a newly issued 5-year note would be stripped into eleven separate securitiesten representing the note's semiannual coupon payments, and one representing its final

principal payment.

The new securities are called coupon strips and principal strips Collectively called as Treasury Strips No difference for an investor, Both are Zero-coupon securities. A technical difference of CUSIP number remains intact. Different CUSIP number makes them fungible.