Federal debt securities present low default risk

Article

From a marketable government debt securities standpoint, investors are offered many choices.

Key Points

Q What are the differences among the various government debt offerings?

Treasury bills (T-bills). T-bills are short-term debt obligations, with maturities of 13, 26, or 52 weeks. They are sold at a discount from face value with the difference between the purchase price and the face value (or the sales price if sold prior to maturity) being the "interest." The interest, however, is not taxable until the bill is sold or matures.

Treasury notes. Treasury notes are medium-term debt obligations, with maturities ranging from 2 to 10 years. Notes have a fixed interest rate and pay interest on a semi-annual basis.

Treasury bonds. Treasury bonds are issued for terms of 30 years. Like Treasury notes, T-bonds have a fixed interest rate and pay interest on a semiannual basis.

Treasury inflation-protected securities (TIPS). TIPS are a relatively new type of government debt. With a fixed percentage yield, and paying interest every 6 months, TIPS are intended to provide protection from loss of purchasing power due to inflation. At issue, TIPS have a par value or principal amount. The value of the principal amount is then adjusted for changes, up or down, based on changes in the Consumer Price Index. Each interest payment is calculated by multiplying the adjusted principal amount by the fixed percentage rate. At maturity, the investor receives the greater of the inflation-adjusted principal amount or the face value at original issue. TIPS are issued with maturities of 5, 10, and 20 years.

If an investor buys a marketable government bond and holds it to maturity, the issuer is obligated to repay the full face amount. If such a bond is sold before it matures, the investor may receive more or less than the amount originally invested. Bond prices can move up and down, most often in response to changes in the general level of interest rates. If rates rise, the price of existing bonds usually falls. If interest rates decline, the market value of existing bonds generally increases. Marketable government bond prices may also be affected by general business and economic factors.

There are a number of debt securities available that are widely thought of as being "government" bonds, but may not necessarily be fully backed by the government. These debt instruments are normally issued under authority of an act of Congress and usually involve some form of government guarantee or sponsorship. Most are traded in public markets, come in different forms, and are issued by entities such as the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Financing Bank (FFB). From a tax standpoint, interest income from these securities may not be exempt from state and local income taxes.

Keep in mind that not all of these securities are backed by the "full faith and credit" of the U.S. government, so be sure to ascertain that prior to investing.

Q What is the role of the "executor" in an estate plan?

A Executors play a vital role within the estate plan. They will be called upon to coordinate payment of debts and death taxes and then distribute the remaining assets to the beneficiaries. In addition, the executor must have enough financial savvy to oversee the management of estate assets and filing of required tax returns. The executor must also be reliable and sensitive to any special needs of the beneficiaries. The best candidate would be someone who is organized, experienced in maintaining records, and has some business or finance knowledge.

Joel M. Blau, CFP is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or blau@mediqus.com
or paprocki@mediqus.com
.

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