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Understanding bonds, treasury bills and notes is very important when you are planning to invest in this area. Bonds are a written promise or obligation binding a government, corporation or individual to pay a sum of money to someone else on a certain date. This document represents a debtor creditor relationship and they are classified as either simple or conditional. United State Savings Bonds represent the United States obligation to pay you, or the bond holder, the amount of the bond. When you buy a savings bond you will pay less then the face amount of the bond. When the bond becomes payable and you go to the bank to cash it in, you will receive the face value of the bond. The difference between the amount you paid and the amount you receive when you cash the bond in is the interest you have earned on the bond. When you cash in a U. S. Savings Bond before its maturity date, you do not receive the face amount of the bond. Instead you will get an amount that includes less interest than you could have earned if you held the bond until maturity.
Corporate bonds are issued by a corporation to help raise additional capital to expand its operations. The corporation will offer the investors an issue of bonds that in truth are a promise to pay a fixed sum with interest on a certain date. Corporate bonds are secured by a lien or mortgage on corporate property. This gives the bond holder the right, should the corporation meet with financial disaster, to demand that the property backing the bond be sold to pay off their claims. In this case the bond is made payable to you and has interest coupons which reflect the obligation of the corporation to pay the interest periodically. When the interest has been earned, the bond holder clips the appropriate coupon and deposits it in a bank to collect their interest. In some cases these bonds may be registered in the name of a specific individual with the interest paid directly and no coupons involved.
New issues of T bills come out weekly presented at Treasury auctions. In most cases this occurs on Mondays, with notes and bonds presented at irregular intervals during the month. T-bills are sold at a discount with you getting face value at maturity. They bear no interest. T-notes and bonds are interest bearing and can many times be bought at a discount at auction. New issue can be purchased directly from a Federal Reserve Bank or one of its branches. If you are interested in buying bonds at an auction, you will need to contact the Federal Reserve and request the dates of any upcoming sales. You will also need to request a tender form if it is required and payment instructions. In most cases if you are interested in T-notes or bonds a letter will work well. Be sure you check the non-competitive box on the tender form or say in your letter that your bid is non-competitive. This will ensure that your order will be filled. Take your completed form or letter to any Federal Reserve by 1:30 P.M. EST of the date of the sale or mail it so it will arrive one day prior to the sale. Your order should be addressed to the Fiscal Agency Department of the Federal Reserve Branch. Be sure you include your name, address, telephone number and social security number with your correspondence.