Gary Poster, with essential assists from Galyn Norwood, Phiroon Phihakendr, Jose Quijada, Pavandeep Kalra. When you buy a bond, you are loaning your money for a certain period of time to the issuer, be it General Electric or Uncle Sam. And because a bond represents an IOU, rather than an ownership interest like a stock, bondholders go to the front of the creditors' line if the issuer goes bankrupt.
Stockholders stand at the rear.
Interest is exempt from state and local taxes, but not from federal tax. Because of their almost total lack of default risk, Treasuries carry some the lowest yields around. Nevertheless, because their safety is so alluring, Treasuries are among the most liquid of debt instruments. The difference reflects the interest you earn. Treasury notes mature in two to 10 years.