THE STEADY STAPLES OF A WELL-BALANCED PORTFOLIO in Software

Drawer QR Code JIS X 0510 in Software THE STEADY STAPLES OF A WELL-BALANCED PORTFOLIO

TREASURY BONDS Treasury bonds also pay their interest on a semiannual basis and are sold at or near their par values However, T-bonds have maturities that are greater than 10 years, going all the way up to 30 years Generally, analysts use the 10-year and 30-year yields as benchmarks when discussing the economy and interest rates Like T-bills and T-notes, Treasury bonds are highly secure investments Treasury bills aren t callable, due to their short-term maturities Treasury notes are also not callable However, Treasury bonds may be Some longer-term bonds may be callable at par five years before they mature Otherwise, they aren t callable The fact that generally these securities aren t callable, coupled with their high credit rating, makes Treasury bills, notes, and bonds an important part of some investors portfolios Generally, the interest and capital gains on Treasury notes and bonds is fully taxable for federal income tax purposes, but exempt from state and local income taxes This somewhat increases the aftertax yield when compared with equivalent yields from corporate bonds or other interest-yielding accounts If Treasury notes or bonds are purchased at a premium, the premium amount may be amortized over the remaining life of the bond, just as it can in the case of corporate bonds The sale of Treasury notes and bonds also brings about the same result as corporate bonds when it comes to paying federal income tax INFLATION-INDEXED TREASURY NOTES AND BONDS The US Treasury has introduced Treasury Inflation-Protection securities These are T-notes and bonds that have a fixed interest rate, which is applied to the principal amount that is adjusted for inflation or deflation periodically The inflation or deflation amount is based on the adjusted consumer price index These securities pay interest semiannually, just like regular T-notes and bonds, and the principal is paid upon maturity This principal includes any inflation or deflation adjustments that have been made over the life of the security At maturity, the greater amount of either the original par value or the inflationadjusted principal will be paid Therefore, if serious deflation occurs and at maturity your note or bond is not worth the original par value, you will receive the greater amount, in this case, the original par

value These notes and bonds are designed to protect investors from any inflation risk Because the principal amount and the interest paid on these are subject to adjustments, there are tax consequences Each year, the investor will have gross income from not only the interest amount paid, but also the amount that the principal has been adjusted by, if the principal is increased for inflation If the principal were decreased for inflation, the taxable amount would decrease Even though the principal isn t paid until the bond or note matures, current tax law stipulates that the adjustments be taxable for the year in which they occur Because of this, many advisors believe that these inflation-adjusted securities may be best for tax-qualified plans, such as IRAs, since the annual income isn t taxed until distributions begin For example, the Smiths decide to purchase a 10-year inflationindexed Treasury note with the face value of $10,000 Its current coupon rate is four percent Let s assume that for the year following the Smith s purchase, inflation is 35 percent At the end of that year, the note s principal amount would be adjusted to $10,350; the interest paid to the Smiths would be based on this new amount, or $414 per year The principal amount will continue to be adjusted like this for the lifetime of the note Thus, the corresponding interest rate will also adjust to the new principal amount each year

Face value = $10,000 Interest = 4% Inflation = 35% New face value = $10,000 + 35% = $10,350 New interest rate = $10,350 4% = $414 (paid annually) All amounts are hypothetical

US Savings Bonds There are two types of savings bonds that are currently being issued: the Series EE and Series HH US savings bonds are registered, nontransferable, and noncallable securities Because they are nontransferable, they aren t marketable you can t sell them to another party, you can only redeem them They are also unable to be accepted as collateral for a loan because of this provision Series EE bonds are sold in par value amounts of $50 to $10,000, but the purchase price is 50 percent of the face value (ie, you pur-