The US government runs consistent budget deficits, and must finance those somehow. The way it does that is by selling “Treasuries”. These are short-, middle-, and long-term loans that an individual makes to the government. They operate like all other bonds in that they have the three basic components of a bond:
1) Maturity: the date (at some time in the future) when the loan will be repaid, in full.
2) Principal: the amount of money you have to pay to acquire the bond. This is the amount you receive upon maturity.
3) Coupon: in the case of Treasury bonds, this is the biannual payout you receive; also referred to as interest.
In essence, if you make a loan to the government of $1,000 with a 10-year maturity and a 3% interest rate, you will receive $15 every 6 months for the next ten years, and you will receive $1,000 when the tenth year is over.
There are three basic types of government debt, the details of which vary based on the length of maturity. These are the short-term T-bill, the middle-term T-note, and the long-term T-bond.
Treasury bills (a.k.a. T-bills), the short-term bonds, last less than a year and always pay out the principal upon reaching maturity, as opposed to the staggered payment system used for interest on longer term bonds. T-bills do not actually carry an “official” interest; instead, they are sold at a lower price than the government will have to pay back. The result is that they effectively carry interest, which can be calculated according to this formula. They are referred to as “bills” because they are the most liquid of all government debt, meaning that they are the easiest to buy and sell, and also to convert into (or use in place of) cash. T-bills are considered the safest investment for investors anywhere in the world.
Treasury notes (a.k.a. T-notes), the middle-term bonds, range from 2-10 years for maturity, and $100 to $1,000,000 in value. They pay out the interest biannually, and the principal upon maturity. T-bond prices are considered one of only a few reliable indicators of future economic performance.
Treasury bonds (a.k.a. T-bonds) the long-term bonds, operate the same way as T-notes, except that they last considerably longer, normally either 20 or 30 years.
The final bond variety, which is a mix of T-notes and T-bonds is the Treasury Inflation-Protected Security (TIPS). TIPS (as the name suggests), track the consumer price index (the usual measure of inflation), and use it to adjust the bond’s payout, so as to protect the holder from the effects of inflation.