If you're looking for a safe, virtually default risk-free marketable long-term investment, consider Treasury bonds - one of three major types of U.S. government debt securities issued by the Treasury.

What Are Treasury Bonds?

Treasury bonds, sometimes called simply T-Bonds, are U.S. government debt securities with a maturity of more than 10 years. They are marketable in a very liquid secondary market, and have a fixed interest rate coupon that is paid semiannually. Income from a T-Bond is only taxed by the federal government.

When you purchase a T-Bond, you have given the U.S. government a loan to finance its expenditures. As the bonds are issued by the U.S. government, they are known in the market as risk-free because of the very little risk of default, which exists partly because the U.S. government can raise taxes or otherwise increase revenue to ensure investors receive their interest payments.

Treasury bonds are issued in maturities ranging from 10 to 30 years. The minimum face-value of a bond is $1,000, although, the minimum bid for a T-Bond is $100, and they are sold in $100 increments.

The main difference between U.S. Treasury bonds and corporate bonds is the rate of interest paid. U.S. Treasury bonds are considered essentially 'risk-free' investments, so the interest offered is usually low, compared with corporate bonds with a higher risk possibility, which offer higher interest rates to entice investors and compensate them for their risk.

What Are Treasury Notes?

Treasury notes, which are sold in increments of $100, are similar to T-Bonds, but are issued in 2-, 3-, 5-, 7- and 10-year maturities. Like T-Bonds, they pay interest every six months until they mature. The yield is determined at auction. Another difference between T-Bonds and T-Notes, as they're sometimes called, is that the price of a T-Note may be greater, less, or equal to the face value - what you're paid when the note matures -- of the note, though $100 is the minimum purchase price. Like T-Bonds, T-Notes are sold at auction by the U.S. Treasury, and can be purchased directly from the Treasury, or through banks or brokers. An investor can bid on a T-Note in two ways: with a noncompetitive bid, or a competitive bid.

A noncompetitive bid, in which you agree to accept the yield determined at auction, guarantees you receive the note you want and in the full amount you want. You can place a noncompetitive bid directly with the U.S. Treasury through its online TreasuryDirect.gov portal, or through a bank or a broker.

A competitive bid allows you to specify the yield you are willing to accept. In that case, your bid may be accepted in the full amount you want if your bid is less than the yield determined at auction, or accepted in less than the full amount you want if your bid is equal to the high yield, or rejected if the yield you specify is higher than the yield set at auction. To place a competitive bid, you must use a bank or a broker.

The T-Notes, like T-Bonds, are issued in electronic form, and you can hold them until they mature, or sell them before they mature. In any single auction, a bidder can buy up to $5 million in notes with non-competitive bids, or up to 35% of the initial offering amount by competitive bidding, according to the U.S. Treasury's TreasuryDirect portal.

What Are Treasury Bills?

T-Bills, or Treasury bills, are typically sold at auction at a discount from their face value, also called 'par amount.' For instance, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86. At maturity, you would be paid its par value -- $1,000. Your interest would be the face value minus the purchase price. T-Bills only pay interest upon maturity. It is also possible for a bill auction to result in a price equal to par, meaning the Treasury will issue and redeem the T-bills at par value. T-bills, like other Treasury securities, can be purchased from the Treasury directly, or through a bank or broker.

Four-week, 8-week, 13-week, 26-week, and 52-week bills can be bid on from either of the three methods. T-bills, like T-Notes, are sold in increments of $100, with a minimum purchase of $100. Only so-called Cash Management T-bills must be bid on using just a bank or broker. All bills except 52-week bills and cash management bills are auctioned every week. The 52-week bill is auctioned every four weeks, while cash management bills are not auctioned on a regular schedule.

Like T-Notes, T-Bills can be bid on with a noncompetitive bid or competitive bid. With a noncompetitive bid, you are guaranteed to receive the bill you want, in the full amount you want, if you agree to accept the discount rate determined at auction. With a competitive bid, you specify the discount rate you are willing to accept. Your bid may be accepted in the full amount you want if the rate you specify is below the discount rate set at auction; may be accepted in less than the full amount you want if the bid is equal to the high discount rate, or rejected if the rate you specify is higher than the discount rate set by the auction.

You can bid directly via the Treasury to place a noncompetitive bid, or use a bank or broker. To place a competitive bid, you have to use a bank or broker.

Cash management bills usually mature in a matter of days, and are issued in variable terms. Bills, like T-Notes, are issued in electronic form. In a single auction, you can buy up to $5 million in bills by non-competitive bidding, or, by non-competitive bidding, up to 35% of the initial offering amount.

What Are the Main Differences Between Treasury Bonds, Notes and Bills?

The main difference between T-Bonds, T-Bills and T-Notes is maturity. If you are interested in an instrument that will pay you a fixed amount of interest over the longest period of time, and that also has a very liquid secondary (resale) market, T-Bonds would be your best bet. The interest (yield) will be low, because payment is virtually guaranteed, but you would receive interest payments at a fixed rate every six months on your bond over a minimum of 10 years and, if you bought a later-maturing bond, 30 years. And you'd only pay federal, not state or local, income tax on the yield

If you are more concerned with a return of your principal in a shorter maturity, your next best bet would be T-Notes. Because T-Notes range in maturity from 2-, 3-, 5-, 7- and 10-year maturities. Like T-Bonds, they pay interest every six months until they mature. But the yield on a T-Note is determined at auction. Also, the price of a T-Note may be greater, less, or equal to the face value - what you're paid when the note matures -- of the note, though $100 is the minimum purchase price.

T-Bills, on the other hand, sold in 4-week, 8-week, 13-week, 26-week and 52-week maturities, are typically auctioned at a discount from their par amount. You could buy a $1,000 T-Bill at a price per $100 of $99.986111, for $999.86. At maturity, you would be paid its par value -- $1,000. Your interest would be the face value minus the purchase price. But remember, T-Bills only pay interest upon maturity. And it is also possible for a bill auction to result in a price equal to par, meaning the Treasury will issue and redeem the T-bills at par value. All bills except 52-week bills and cash management bills are auctioned every week. The 52-week bill is auctioned every four weeks. Cash management bills aren't auctioned on a regular schedule.

How to Buy Treasury Bonds

  • First, determine how long you want or think you can afford to hold your bonds until maturity - a minimum of 10 years and a maximum of 30.
  • Remember that T-Bonds are auctioned with a minimum denomination of $1,000, and pay coupons (fixed interest) semiannually.
  • Treasury bonds are auctioned monthly. Original issues are auctioned in February, May, August, and November. Other auctions are reopenings. For specific dates, check TreasuryDirect.gov's Tentative Auction Schedule, or Upcoming Auctions.
  • You can purchase T-Bonds directly from the U.S. Treasury at an auction, via TreasuryDirect.gov, or through banks or brokers.
  • You can bid on T-Bonds two ways: a noncompetitive bid, or a competitive bid.
  • The maximum amount you can purchase with a noncompetitive bid is $5 million; the maximum amount you can purchase via competitive bid is 35% of the initial offering amount.
  • Noncompetitive bids can be placed directly with the U.S Treasury, through banks or brokers. Competitive bids can only be done through a bank or broker.
  • After purchasing a T-Bond at auction, it can be sold on the secondary market, where the price can fluctuate considerably. There may also be a financial penalty for selling a bond before its maturity. When rates at an auction increase, the value of the T-bond's future cash flow is discounted at the higher rate, so its price decreases. Similarly, when the auction price for a bond increases, its yield rate decreases.

What to Know Before Buying Treasury Bonds:

  • T-Bonds are long-term investments. You cannot purchase one directly from the Treasury for less than $100, and T-Bonds usually are purchased in increments of $100, with face values of $1,000.
  • The minimum maturity of a $1,000 T-Bond is 10 years. Meaning, while you'll be paid interest every six months on your $1,000 loan to the government, you won't be paid back your principal for a minimum of 10 years.
  • You could sell your T-Bond after purchase on the secondary market, but rates and prices fluctuate considerably there because the debt is virtually guaranteed to be paid.
  • Because it is considered such a 'safe' investment - it will earn interest, and you will be paid back your principal - the interest rate paid semiannually is usually quite low.
  • T-Bonds are safer long-term investments - because they have a fixed face value and fixed interest rate at auction - than even depositing money in a bank. But they aren't as "liquid"-you won't be able to take your money out for a minimum of 10 years.

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