So Many Shoes, So Little Money – Blog

Low Risk Investments

July 14th, 2009

The lowest risk investment class is those which are either federally insured or backed (meaning “guaranteed”) by the United States government. They are considered low risk because your chances of losing your money are slim to none: Either the US government has agreed to protect you by insuring your investment in the event of a loss or because they are the ones promising to pay you back. Generally, there are five kinds of investments that are considered “safe”:

Bank checking and savings accounts

Certificates of deposit (CD’s)

United States Treasuries and savings bonds

Fixed annuities (which, while not guaranteed by the government, are usually sold by companies that have the highest credit rating and highest chance to be repaid)

Money market funds which have been issued by a bank.

I’ve discussed checking and savings accounts before.  United States Treasuries, are loans made by investors (you) to the US government. The money you loan them and the interest payments they owe you are both backed by the full weight of the US government.

Why would the US government need a loan?  Sometimes they need the money to fund programs, meet their payrolls or to pay their bills. So, they ask for a loan. When they need a loan, why don’t they just print more money or go to a bank?  They try not to print more money because printing money can cause unwelcome side effects in the economy. The Government usually doesn’t just borrow from a bank because the federal government is already the largest bank customer in the country. So, because they can’t print themselves more money without repercussions, and because they are already the largest bank customer, they come to you and me to help them out.

Here’s how Treasuries work: Treasuries are part of a larger class of investments known as debt securities. The name comes from the fact that when the government (or a company) decides to ask for money, they are borrowing money by asking for a loan, and adding to their debt (or the amount of money they owe). In the case of a Treasury, the US government owes the money to you and the loan is backed by their full weight (meaning they guarantee it). As a result, loans to stable governments, such as the United States, are considered extremely safe investments. Other countries also use debt securities to raise money. Loans to major industrial countries, like the United Kingdom, are generally considered safe; loans to developing countries are considered more risky. The reason loans to developing countries are considered riskier is because the ability of those governments to pay back their loans is considered less certain than say those of the United States (governments have credit ratings just like people and companies).

The loans that the government asks for can be short or long term—just like your love affair with a particular pair of shoes. Loans are classified according to the length of time which has to pass before the government is required to pay back its loan holders:

Treasury Bills – loans maturing in less than one year.

Treasury Notes – loans maturing in one to 10 years.

Treasury Bonds – loans maturing in more than 10 years

As you can see, there are really three different kinds of Treasury investments:  Treasury Bills, treasury notes and treasury bonds. When you buy a treasury bill, you can expect the government to hold your money and pay you interest plus the full value of your loan in less than one year. When you buy a treasury note, you can expect the government to hold your money for between one to ten years (you get to choose which time period you prefer) and to pay you interest plus the full value of your loan during that time. When you buy a treasury bond, you can expect the government to hold your money for 10 years or more and pay you interest for all of that time. The longer the time period, the higher the interest rate because the longer you are agreeing to let them tie up your money.

Filed under: Investing

Tags: Investing