Treasuries are bonds issued by the U.S. government through the Department of the Treasury to
raise money for government expenses and to pay the nation’s bills.
They're considered one of the safest investments because they’re backed by the full faith
and credit of the U.S. government.
Like other bonds, they also provide consistent income through payments called coupons and
return your original investment at maturity.
Knowing how to add Treasuries to a portfolio can be an important skill for investors looking
to take advantage of higher interest rates and manage volatility in their portfolios.
One of the easiest ways to buy Treasuries, as well as other fixed income investments,
is using the Bond Wizard on tdameritrade.com.
The wizard can help you find individual bonds or build a bond ladder—a group of bonds
with different maturities.
For this video, we’ll focus on buying individual Treasury bonds.
Under Find individual bonds & CDs, I’ll click Select and Continue.
Next, I’ll specify which type of account we’re using: a regular account or a tax-deferred
account, such as an IRA or 401(k).
Consider speaking with a tax professional to determine the most tax-efficient strategy
for your situation.
I’m going to select A regular individual or joint account and then select Continue
to Next Step.
Next, we’re prompted with a question from the wizard about tax exemption.
This feature will help find bonds with tax advantages.
We aren’t looking for that today, so I’ll select No, I don’t need tax-exempt investments.
Now, we’ll select the bond maturity.
Treasuries are often classified by maturity: bills, notes, and bonds.
Treasury bills mature in one year or less, notes in two to 10 years, and bonds are anything
longer than 10 years.
The maturity you select will depend on your goals.
In normal market conditions, the longer the maturity, the higher the rate of return.
But, if you need the money in three years, you’d want to buy a bond with a maturity
of less than three years.
For this example, let’s assume we need the money in three years, so I’ll select 3-5
years.
Then we can enter how much we plan to invest.
I’ll keep it low and enter 5,000.
Next, we’ll designate that we’re looking for Treasuries, so I’ll select Treasuries,
Agencies, & CDs.
The wizard gives you the ability to exclude callable bonds, but most Treasuries aren’t
callable so we can leave it as is.
Because we’re just looking for Treasuries, I’ll deselect CDs and Government-sponsored
agency bonds.
Here we see a list of bonds that fit our criteria.
There’s a longer list of Treasuries if we select the View all Treasury Results link
below the list.
For this example, let’s work with these results.
Let’s talk through each item in the listing.
The CUSIP is a unique identifier for a certain batch of bonds.
Next is the Order Quantity/Available, or the minimum number of bonds we must buy and the
number of bonds within this CUSIP.
When a bond is issued, it’s given a face value, which is usually $1,000.
Then, when it hits the secondary market, it may trade for more or less than face value.
We can make a rough estimate that we’ll probably need around $5,000 to buy five bonds.
The Issue is a brief description of the bond.
The Coupon is how much interest the issuer is paying on the bond.
In this case, it’s 2.25%, or $22.50 per bond per year.
The Pay Frequency tells us that the coupon is paid semi-annually, so we can expect two
payments of $11.25 per bond each year.
The payments will end at Maturity, which we can see is November 15, 2025.
At maturity, we’ll receive the par value of the bond, which is usually the same as
the face value of $1,000.
Below maturity is Ratings, which is a grade given by a third-party rating agency.
Treasuries are considered the safest investment, so they don’t usually have a third-party
rating.
The YTM, or yield to maturity, is the expected rate of return for the entire investment,
which is an important metric for comparing bonds in the secondary market.
In this case, it’s 4.193%.
It includes the coupon rate as well as the appreciation you gain for buying the bond
at a discount and later redeeming at par value.
Let’s breakdown what this means by skipping over to Price.
The price of this bond is 94.576.
When multiplied by the par value, the cost per bond is $945.76.
So, we could buy this bond below the $1,000 face value.
This is why the yield to maturity is higher than the coupon; it factors in the discounted
purchase price.
If we purchase a bond at a premium, the yield to maturity would be lower than the coupon
rate.
Moving back, the YTW, or yield to worst, is helpful when comparing callable bonds because
the rate of return may be different if the bond is called away.
Finally, under Action, I’ll select Buy to move to the order screen which has a few additional
features.
The first is Pay Months, which are when coupon payments are made.
This bond pays in May and November.
Next is Accrued Interest.
Accrued interest is the pro-rated amount of interest the previous owner is entitled to.
We happening to be hitting this bond just as it’s paying interest, so there’s no
accrued interest.
Below Accrued Interest is the Total Cost.
This includes the price for each bond and the accrued interest.
Our total cost for these five bonds is $4,728.80.
If we’re interested in buying more bonds, we could change the Buy Quantity and then
select Calculate Total Cost to see how it changes.
Let’s go ahead with our five bonds.
If everything looks good, we can select Review Order and then Place Order.
The Bond Wizard is designed to make buying individual Treasury bonds easy by taking you
through the process step by step.