Bonds, CDs and Treasuries: What Each One Actually Promises

A bond is a loan with a schedule attached. You hand over money, the borrower agrees to pay interest on a stated timetable and return the principal on a stated date, and the whole thing is a contract rather than a hope. That's the appeal, and it's also the source of every misunderstanding in this corner of finance — because the contract is only honored on its own terms, and selling early means taking whatever the market offers that day.

This is general education, not investment advice. Rates change constantly, so treat every rate in here as a snapshot with a date on it and check the current figure before acting — today's yield on any of these is not a prediction of tomorrow's, and past performance does not predict future results.

The Treasury lineup, by term

Everything the U.S. Treasury sells to individuals is on treasurydirect.gov, and the difference between the products is mostly duration and how the interest arrives.

• Treasury bills come in 4, 6, 8, 13, 17, 26, and 52-week terms. Minimum purchase $100, in $100 increments. They pay no coupon — you buy at a discount to face value and collect the face value at maturity.
• Treasury notes run 2, 3, 5, 7, and 10 years and pay interest every six months.
• Treasury bonds run 20 and 30 years, also paying every six months.
• TIPS come in 5, 10, and 30-year terms, with principal that adjusts for inflation.
• Floating rate notes are 2-year securities paying quarterly, with rates tied to 13-week bill results.

The 4 through 26-week bills auction weekly; 52-week bills auction every four weeks.

One feature applies across all of them and is regularly undervalued: interest on Treasury securities is subject to federal income tax but not to state or local income tax. If you live somewhere with a meaningful state income tax, that exemption is a real part of the return, and comparing a Treasury yield to a bank CD yield without adjusting for it understates the Treasury.

How a T-bill actually pays you

There's no interest payment, which confuses people. Suppose you buy a 26-week bill with a $1,000 face value and pay $976.50 for it. At maturity you receive $1,000.

• Your interest is $1,000 − $976.50 = $23.50.
• As a percentage of what you actually put in: $23.50 ÷ $976.50 = 2.41% over about half a year.
• Annualized, that's roughly 4.8%.

The price is set at auction, and individual buyers place non-competitive bids, meaning you accept whatever rate the auction produces rather than specifying one.

The seesaw: why bond prices fall when rates rise

This is the mechanic that surprises people who thought bonds couldn't lose money, and the SEC's investor bulletin on the subject uses a seesaw to describe it: market interest rates on one side, fixed-rate bond prices on the other. One goes up, the other goes down.

The bulletin's own illustration: a Treasury bond priced at $1,000 yielding 3%. If market rates fall to 2%, the bond's price rises to about $1,082 — your above-market coupon is now worth a premium. If market rates rise to 4%, the price falls to about $925, because nobody will pay full price for a 3% payment stream when 4% is available new.

Two rules follow, and both are in that bulletin. Longer maturities carry more interest rate risk than shorter ones. And lower coupons carry more interest rate risk than higher ones — a 2% bond falls further than an otherwise identical 4% bond when rates climb.

Critically, none of this touches you if you hold to maturity. The Treasury pays the face value on the date it said it would. The loss is only realized if you sell early, which is why the honest question about any bond isn't "is it safe" but "can I hold this until it matures."

TIPS, and the tax quirk that comes with them

TIPS adjust their principal with the Consumer Price Index — up with inflation, down with deflation — and pay a fixed rate of interest every six months on that adjusted principal. Because the principal moves, the dollar amount of each payment moves too. The auction-set rate is never less than 0.125%.

There's a floor at the bottom: when a TIPS matures you receive either the inflation-adjusted principal or the original principal, whichever is greater. You never get back less than you lent, in nominal terms.

The catch is federal taxes. TreasuryDirect states it plainly: federal tax is due each year on interest earned, and any increase or decrease in the principal during the year may affect your federal taxes. The inflation adjustment can be taxable in the year it happens, even though the cash doesn't arrive until maturity — which is why TIPS are frequently held inside IRAs and 401(k)s, where the timing mismatch is irrelevant.

Series I savings bonds

I bonds combine a fixed rate that never changes for the life of the bond with an inflation rate that resets every six months. For bonds issued from May 1, 2026 through October 31, 2026, the composite rate is 4.26%, built on a 0.90% fixed rate. Bonds bought in a different issue window carry a different fixed rate permanently.

The rules that decide whether they fit your situation:

• $25 minimum purchase, in any amount above that to the penny.
• $10,000 per calendar year in electronic I bonds per Social Security number or EIN. That cap is the single biggest constraint on the product.
• You cannot redeem at all for the first 12 months. Not for a good reason, not for an emergency. The money is locked.
• Redeem before five years and you forfeit the last three months of interest.
• They earn interest for 30 years.
• Federal income tax applies to the interest; state and local income tax does not.

Worked out: $10,000 bought during the current window earns at an annualized 4.26% for its first six months — roughly $213 credited — and then the inflation component resets and the rate changes. Cash out at, say, 18 months and you'd surrender the most recent three months of that accrual.

CDs: the bank version and the brokered version are not the same product

A bank CD is straightforward: fixed rate, fixed term, an early withdrawal penalty stated up front, and FDIC insurance up to $250,000 per depositor, per insured bank, per ownership category. Credit unions work the same way through the NCUA Share Insurance Fund, which insures individual accounts up to $250,000 and separately covers IRA and Keogh accounts up to $250,000.

A brokered CD is bought through a deposit broker and behaves differently in ways the SEC spells out in its brokered CD bulletin:

• They typically pay simple interest rather than compounding it, so your interest doesn't earn interest.
• Terms run much longer than typical bank offerings — out to thirty years.
• Many are callable. The issuing bank can terminate the CD early; you cannot. Rates fall, the bank calls, and you reinvest at the lower rate.
• Instead of an early withdrawal penalty, you sell in a secondary market — where the price moves with interest rates, and where you can lose part of your principal. Your broker may charge a fee for the sale.
• FDIC coverage still applies, but you have to watch aggregation: if the brokered CD's issuing bank is also where you keep a savings account, the balances combine against the same $250,000 limit.

Worth knowing what deposit insurance does not cover, at a bank or a credit union: mutual funds, annuities, life insurance, stocks and bonds, municipal securities, and crypto assets, even when sold on the premises.

Where these are the wrong tool

A 30-year Treasury is not a conservative investment. It carries no credit risk worth discussing and enormous interest rate risk, and people who bought long bonds believing "government bonds are safe" have watched market values move sharply. Safe from default is not the same as safe from loss.

I bonds cannot be your emergency fund, at least not in year one — the 12-month lockup makes them unavailable exactly when an emergency fund is supposed to be available. They work as a second-tier reserve behind actual liquid cash. Our guide on where an emergency fund should live covers the first tier.

And a callable brokered CD reaching for an extra quarter point of yield is usually a bad trade dressed as a good one. You've sold the bank an option, and they'll exercise it at the moment least convenient for you.

Buying directly, step by step

1. Open an account at treasurydirect.gov and link a checking or savings account for funding. It is a government website and it looks like one; budget twenty minutes and a little patience.
2. Decide term first, rate second. Matching the maturity to when you need the money is what removes interest rate risk from your life.
3. For bills, notes, bonds, and TIPS, place a non-competitive bid of at least $100 in $100 increments ahead of the relevant auction date.
4. For I bonds, buy any amount from $25 up to the $10,000 annual electronic limit per Social Security number.
5. Decide whether to reinvest at maturity. TreasuryDirect can roll a maturing bill into a new one automatically, which is how people build a ladder without a calendar reminder.
6. Keep TIPS in a tax-advantaged account where you reasonably can, given the annual taxation of principal adjustments.

If you only do one thing from this page: check what your idle cash is earning today, and compare it to the current 4-week and 13-week bill rates published on TreasuryDirect. That comparison takes two minutes and settles the question with numbers instead of instinct.