Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, November 20, 1995 TAG: 9511220024
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
That's not surprising considering that the interest rates paid on treasury bills and bonds are well above the annual inflation rate, yet they are free of state and local taxes.
These investments are backed by the full faith and credit of the government so they are, if that is possible, even more secure than bank-issued certificates of deposit.
Yields are competitive with certificates of deposit and other risk-free cash investments. At last week's auction, for instance, the yield on the 13-week bill was 5.6 percent, while the 26-week investment yielded 5.57 percent. The one year bill carried a rate of 5.45 percent.
At the end of October, inflation was running at an annual rate of 2.8 percent.
For rates and yields on longer-term Treasury notes and bonds, call the Federal Reserve Bank of Richmond. The number for a recording is 804-697-8355.
John C. Parrott II, a certified financial planner with Wheat First Butcher Singer in Roanoke, said his firm uses Treasury securities in planning portfolios for all of its clients on fixed incomes.
He said the Treasury investments are "laddered." That means that the client purchases securities with different maturity dates, some close and others more distant in time.
That method gives a good average of rates, Parrott said, and it means the investments are liquid because some bills are always maturing and therefore ready in case of an emergency.
"We use them a lot" in working with clients, Parrott said. He said the interest is a little higher than it appears because the income is free from state taxes.
The Institute of Certified Financial Planners said Treasury securities come in three forms:
Bills, which are short-term and mature in three, six or 12 months.
Notes, which are intermediate in length of time to maturity. The principal comes due in two, three, five or 10 years.
Bonds, which are long-term and carry maturities of 30 years.
Interests rates are determined by auctions, which are scheduled according to the type of investment. There is also a secondary market, where investors can buy and sell Treasuries purchased through a broker, but the principal can fluctuate on this market inversely to the direction of interest rates.
The minimum investment for so-called T-bills is $10,000, with additional amounts in multiples of $1,000.
T-bills are sold at a discount, which means buyers pay less than face value. When the bill matures, they receive the full face amount. The interest earned is the difference between the discount and face value.
Two-year and three-year notes are sold for $5,000 and $1,000 multiples.
Five- and 10-year notes and 30-year bonds are sold for $1,000 and an equal amount for multiples. Interest on notes and bonds is paid every six months directly into your bank account.
The institute said investors can buy Treasury securities directly from the government by opening a Treasury Direct account.
You can ask for a one-page "tender" form by calling the Federal Reserve Bank of Richmond at 804-697-8372. Or you can leave your name and number with the recording phone after listening to the recording.
You can also write to the Federal Reserve Bank, P.O. Box 27622, Richmond, Va. 23261.
When you receive the form, check the box marked "non-competitive" tender, which means you will accept the interest rate bid by institutional investors and professional traders. You will receive the average interest rate accepted at that particular auction.
You must mail the payment for the face amount you are requesting. The discount amount will be wired to a bank account that you specify.
The financial planners gave the following pros and cons for buying directly from the Treasury:
The Treasury Direct program is free, except for a $25 annual fee on amounts of $100,000 or more.
T-bills must be paid for with a casher's or certified check, which will cost you a fee to the bank. Treasury notes and bonds can be paid for with personal checks.
If you buy through a broker or bank, you will pay about $50 for each purchase. Even a no-load mutual fund investing solely in Treasuries will charge you annual expenses and fees.
Investment minimums can be a problem. Not everyone has $10,000 to invest in a T-bill or $5,000 in a note. The $1,000 notes and bonds are closer to investment minimums typical for many mutual funds, but a 30-year bond may not be the right choice for your portfolio.
If T-bills or notes are what you want but you don't have that much money, a mutual fund specializing in those securities might be your best options.
Treasuries are most suitable for those who want to buy and hold their investment. Treasuries bought directly cannot be sold before maturity on the secondary market. To do so, you must transfer them to a broker or bank, which involves time-consuming paperwork and fees.
If you think you might sell before maturity, buy through a broker.
Keep in mind that shares in a mutual fund investing in Treasuries have no maturities, so there is always the risk that you could lose principal if interest rates go up.
Treasuries are backed by the full faith and credit of the U.S. government only for the security's registered owner. If you buy through a bank or broker, they may actually hold the registration in their names. If the brokerage house should fail, you may have to try to get your money back through the Securities Investor Protection Corp.
The planners said you might want to hold the securities in your own name if you buy through a broker or bank.
by CNB