Government Bonds, as the name suggest, are issued by the governments world over to raise funds. The bonds that are issued in foreign currency are known as sovereign bonds. It was the English Government in 1963 which issued the first ever Government Bond to raise funds for a war against France.
Government Bonds are generally free from risk of non-repayment of principal amount and interest to the government bond holders and are considered the safest among different kinds of bonds and securities. However, there have been examples like Russia in 1998 when the government defaulted on the payment though such cases are very few and far between.
There are other kinds of risk too like currency risk and inflation risk. In currency risk, a foreign investor who buys US Government Bonds in US dollar currency will be affected if the value of dollar declines. In cases where inflation is high at the time of maturity of bonds, the bond holders will again be affected since the principal amount will have comparatively less purchasing power than the case where inflation had been normal.
Types of Government Bonds:
Government Bills: Government Bills or Treasury Bills get matured within one year. In Government Bills, interest is paid only after the maturity period along with the principal amount. These bills are sold at a discounted rate and are considered the least risky among all the investment options in the United States.
Government Bills are issued every week for maturity periods ranging from one month, three months, six months and one year. They are sold through auctions held every week and banks and financial institutions are the major buyers of the Government Bills.
Government Notes: Government Notes or Treasury Notes have a maturity period of one to ten years. Unlike Government Bills in which interest is paid only at the time of maturity, the interest is paid only at the time of maturity, the interest on Government Notes are paid at half-yearly intervals. The success of Government Bonds is quoted to the gauge the performance of the Government Bond market in the United States.
Government Bonds: Government Bonds or Treasury Bonds, which are sold through auctions, have the maturity period ranging from 20 to 30 years. Like Government Notes, the interest rate on Government Bonds is paid at half-yearly intervals. From October 2001 to February 2006, the United States government stopped issuing Government Bonds and its place was taken by Government Notes.
However, the Government Bonds were re-introduced in February 2006. The Government Bonds are issued once in every quarter. The Government Bond holder has to pay only federal tax and not state or local taxes. The minimum denomination of the Government Bonds available is 1000 dollars.
Treasury Inflation Protected Securities (TIPS): In these securities, the principal amount is adjusted according to the inflation rate prevailing in the market at the time of maturity though the interest remains the same. TIPS holder will get the principal amount which has been adjusted or the original principal depending on which is greater. If the original principal is greater, TIPS holders are paid that and vice-versa. These securities help in protecting its holders from inflation.
TIPS holders are paid interest rate at half-yearly intervals. The maturity period of TIPS ranges from 5, 10 and 20 years and the minimum denomination is 100 dollars. TIPS holders do not have to pay state and local taxes.
For the investors who want to invest wisely and safely, Government Bonds are the best options as they are risk free and safest though the rate of interest provided by such bonds is less when compared to corporate bonds.