Treasury securities, or simply Treasuries, are issued by the U.S. Treasury. They are considered to be risk free as they are backed by the U.S. government. There are four types of treasury securities:
- Treasury bills (T-Bills) have maturities of less than 1 year. Like a zero-coupon bond, they only pay par value at the maturity date but do not pay coupon.
- Treasury notes (T-Notes) have maturities of 1 to 10 years with semiannual coupon payments.
- Treasury bonds (T-Bonds) have maturities of 20 to 30 years with semiannual coupon payments too.
- Treasury Inflation Protected Securities (TIPS) are inflation-indexed bonds with semiannual coupon payments and have maturities of 5, 10 or 30 years. The par value is adjusted semiannually with the CPI which is the indicator of inflation. The par value would be adjusted higher for the period if there is inflation. The coupon is paid semiannually as a percentage of the par value after this adjustment:
TIPS coupon payment = inflation-adjusted par value * fixed coupon rate /2
An innovation of the investment industry created Separate Training of Registered Interest and Principal Securities (STRIPS, stripped Treasuries, or Treasury strips) by stripping the coupons from Treasuries. A coupon strip refer to the coupon payments separated from the original securities and a principal strips refer to the principal payments separated from the original securities, as the form of zero-coupon bonds.