What are Government Bonds?
A bond is a form of investment in which an investor (either an individual or a business entity) loans a lump-sum, for a certain amount of time, at a set interest rate, to a government body or a business.
Government bonds are types of bonds issued by a national government, which are denominated in that country’s specific currency. Those bonds that are not issued in the underlying government’s currency are typically referred to as sovereign bonds.
When an individual investor or corporation invests in a government bond they are in essence, providing a loan to the issuing government body. The issuing agency takes the lump sum from the investor and uses towards the funding of public services or other expenditures. In turn, the investor is awarded a coupon, which will provide the investor with the full return of their investment plus added interest payments. As a result, the party that invests in the government bonds will obtain a fixed return on their investment that is tied into inflation and interest rates.
Government bonds are viewed as ultra-conservative investments. All government bonds are marketed and issued as risk-free financial instruments, because the governing body will typically guarantee the fulfillment of the loan obligation. Additionally, the government can also raise taxes to redeem the bond at maturity, which adds into the risk-free nature of the bond.
Types of Government Bonds
Treasury notes possess a maturity schedule from 2 to 10 years and are valued at $1,000. These types of Government Bonds are awarded based on two bids: a competitive bid and a noncompetitive bid.