Government Bonds


Government bonds, or sovereign bonds, are offered by a national government. Government bonds usually offer a fixed rate of interest and are backed by the credit of the government that issued them. In many countries, government bonds are considered risk-free because it is assumed the government will not default on its obligations.

More About Government Bonds

Continue reading to learn more about:

How do government bonds work?
How long do you have to hold a bond?
What are the advantages and disadvantages of bonds?
What are examples of government bonds?
What is the difference between stocks and bonds?


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How do government bonds work?


When the government needs to borrow money, it issues bonds. When you buy a bond, you are giving the government money, and in return, it promises to give you back your money with interest after a set period of time. Government bonds have low risk and stable returns, but they don't offer high potential profits like riskier investments can.


 
 

How long do you have to hold a bond?


When you buy a bond, you are lending money to the issuer for a fixed period of time. For example, if you purchased a one-year bond six months ago, it will mature in the next six months. After this period, you can redeem your bond at par value and receive the interest that has accrued over its lifetime.

 

Advantages

1. Government bonds are relatively safe investments because there is almost no risk of default.

2. Reliability: With government bonds, you know exactly what you're getting in terms of both interest payments and principal. 

3. Tried and true: People have been investing in bonds since the beginning of modern finance. 

Disadvantages

1. Relatively low returns: The return on your investment (i.e., your bond income or "yield") is likely to be lower than the return from other, more risky investments. 

2. Interest rate risk: Your investment in a bond is subject to fluctuations in interest rates. If interest rates rise and you can get higher returns elsewhere, the market value of your government bond will drop as people shift their money out of older, lower-paying bonds. 

3. Inflation risk: Although our investments will typically provide a positive rate of return above inflation, if inflation goes up faster than the returns on your investments, you will lose purchasing power in real terms.

 
  • What are examples of government bonds?

    Some examples of government-issued bonds include: 

    • Treasury securities, state and local government series (SLGS) of the United States

    • TIPS (Treasury inflation-protected securities)

    • Variable rate demand notes

    • Federal Farm Credit Bank bank notes, Export-Import Bank bonds

    • FNMA (Federal National Mortgage Association) issues

    • Bonds issued by the Federal Home Loan Mortgage Corporation (FHLMC)
  • What is the difference between stocks and bonds?

    Stocks and bonds are both securities, but the major difference between the two is that stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that stocks offer an opportunity for a capital gain, while bonds provide a stream of interest income.