U.S. Treasury Securities

Once you've decided to invest in bonds, the next question is—which type of bond? Bonds tend to be broadly categorized according to who is issuing them.

U.S. Treasury Securities

U.S. Treasury securities ("Treasuries") are issued by the federal government and are considered to be among the safest investments you can make, because all Treasury securities are backed by the "full faith and credit" of the U.S. government. This means that come what may—recession, inflation, war—the U.S. government is going to take care of its bondholders.

Treasuries are also liquid. A group of more than 20 primary dealers are required to buy large quantities of Treasuries every time there is an auction and stand ready to trade them in the secondary market.

There are other features of Treasuries that are appealing to the individual investor. They can be bought in denominations of $100, making them affordable, and the buying process is quite convenient. You can either buy Treasuries through brokerage firms and banks, or you can simply follow the instructions on the TreasuryDirect Web site. For more information, see the Buying and Selling Treasuries and Savings Bonds section.

As an added bonus, while you must pay federal income taxes on the interest paid to you from Treasuries held outside of a tax-deferred retirement account, you won't have to pay state income taxes on the interest you received.