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Treasury Bonds: Coupons, Auction Pricing, Duration, and Long-Term Rate Risk

Understand current Treasury-bond terms, coupons, reopenings, accrued interest, yield measures, duration, early-sale limits, taxes, and long-horizon risks.

Updated

For educational purposes only; not investment advice. Investing may result in loss.

Direct answer

A Treasury bond is a marketable, fixed-rate direct obligation of the U.S. government. Treasury currently issues bonds with original terms of 20 or 30 years. They pay fixed interest every six months until maturity and repay face value at maturity. New bonds are electronic, have a $100 minimum and $100 increments, and may be held to maturity or sold earlier through the market.

Low credit risk does not mean low price risk. Much of a long bond’s cash flow arrives far in the future, so a change in required market yield can materially change present value. Holding to maturity defines the nominal coupon-and-principal schedule, but it does not guarantee the purchasing power of those dollars, the return earned on reinvested coupons, or a favorable result if the investor must sell early.

Treasury bonds are not U.S. savings bonds. They are marketable securities with fluctuating prices; Series EE and I savings bonds have different accrual, redemption, and transfer rules.

Coupons, auctions, accrued interest, and yield

The annual coupon rate is set at the original auction, is never below 0.125%, and remains fixed for the bond’s life. The regular pattern is four original issues and eight reopenings per year for each term, although the auction calendar can change. A reopening sells an additional amount of an existing bond with the same CUSIP, coupon rate, and maturity date; it is not a newly dated bond.

Treasury uses a single-price auction. Successful competitive bidders and noncompetitive bidders pay the price corresponding to the highest accepted yield. A competitive bid can receive all, some, or none of the requested amount. A noncompetitive bidder accepts the auction yield and receives the requested face amount up to the $10 million limit, but does not know the exact price before the result. TreasuryDirect accepts only noncompetitive bids, and a bidder cannot use both methods in the same auction.

An auction price can be at par, above par, or below par. In a reopening, interest has generally accrued from the dated date, so accrued interest is added to the purchase amount and is returned as part of the next full coupon. In the secondary market, the quoted clean price normally excludes accrued interest; the dirty or invoice price includes it. Record both rather than treating the coupon rate or clean quote as the cash debit.

Several measures answer different questions:

  • semiannual coupon = face value × annual coupon rate / 2
  • current yield = annual coupon dollars / clean market price
  • Yield to maturity discounts all remaining contractual coupons and principal to the full purchase price and assumes holding to maturity and reinvestment at the calculated yield.

Coupon rate, current yield, and yield to maturity are therefore not interchangeable. A premium bond can have a coupon rate above its yield to maturity; a discount bond can have the reverse. Market discount, acquisition premium, original issue discount, settlement date, and tax elections can also affect after-tax results.

Coupon, yield, and duration example

Suppose a bond has $1,000 face value and a 4% annual coupon. Its scheduled payment every six months is $1,000 × 4% / 2 = $20, or $40 per year. If its clean market price is $900, its current yield is $40 / $900 ≈ 4.44%. If $10 of interest has accrued, the settlement amount before fees is $910, not $900.

Current yield ignores the pull from the $900 purchase price toward the $1,000 maturity payment, the timing of cash flows, and coupon reinvestment. Yield to maturity incorporates those items under its assumptions, but it is not a guaranteed interim return. Selling before maturity replaces the contractual maturity payment with the market sale price.

Modified duration gives a first-order estimate for a small yield change:

approximate percentage price change ≈ -modified duration × change in yield

If a long Treasury trades at $100 with modified duration of 18 and its yield rises by one percentage point, or 0.01, the duration-only estimate is -18 × 0.01 = -18%, implying roughly $82 before convexity, accrued interest, coupons, and trading costs. Convexity makes actual gains and losses asymmetric, and a nonparallel yield-curve move may differ from this single-yield illustration.

Total return over a holding period combines price change, coupon income, coupon reinvestment, and costs. A long Treasury ETF is different from one bond: the fund continually maintains maturity exposure, charges expenses, and has no date when an investor’s shares return to a chosen face value.

Risks and purchase checklist

  • Interest-rate and duration risk: a higher required yield can cause a large mark-to-market loss; duration is an approximation, not a forecast or loss limit.
  • Inflation and real-return risk: fixed nominal payments may buy less even when every promised dollar is paid.
  • Reinvestment risk: future coupons may earn less than the reinvestment rate assumed in yield to maturity.
  • Horizon mismatch: money needed before maturity may have to be raised at an unfavorable market price.
  • Yield-curve and term-premium risk: long yields can rise even when the policy rate falls because expected inflation, real rates, supply, demand, or term premium changes.
  • Liquidity and execution risk: spreads, depth, clean-versus-dirty pricing, and dealer execution matter, especially during stress.
  • Operational access risk: TreasuryDirect does not execute an early sale. A newly purchased marketable security generally must remain there for 45 calendar days before transfer to a bank, broker, or dealer for sale; a reinvestment to which new money was added is also subject to the hold.
  • Tax risk: for a U.S. taxpayer, Treasury interest is subject to federal income tax and exempt from state and local income taxes. Accrued interest, premium, market discount, original issue discount, sale gains or losses, account type, elections, residency, and other jurisdictions can change reporting and after-tax return.

Before buying, record the CUSIP, original issue or reopening status, dated date, maturity, coupon, face amount, clean price, accrued interest, full settlement amount, yield measure, duration, costs, tax treatment, custody location, planned holding period, and cash need. Stress both rising-yield and renewed-inflation scenarios instead of relying on one rate forecast.

Common misconceptions

  • “Treasuries have no risk.” Their payment obligation, market-price risk, inflation risk, and operational access are different questions.
  • “The coupon rate is my return.” Purchase price, accrued interest, holding period, reinvestment, and sale or maturity value determine return.
  • “A reopening is a new bond.” It adds supply to an existing CUSIP with the same coupon and maturity.
  • “Rate cuts always lift long bonds.” Inflation expectations, real rates, supply and demand, and term premium can move long yields the other way.
  • “Holding to maturity erases every loss.” It resolves market-price fluctuation for promised nominal cash flows, not inflation, taxes, reinvestment, or opportunity cost.
  • “A duration of 18 guarantees an 18% move.” It is a local first-order estimate and ignores convexity and curve shape.
  • “A long-bond ETF matures back to par.” A rolling portfolio does not provide an individual bond’s maturity event.

Authoritative sources

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