Government bonds explained

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Government bonds explained
Government bonds are more secure than corporate bonds. (savings bonds image by judwick from Fotolia.com)

Government bonds are in a different class than corporate bonds. Corporate bonds are used by companies to raise necessary capital for their business when they do not want to sell ownership. Government bonds are sold to help manage the economy or to pay off a particular government debt, and are issued differently than corporate bonds. They also have a different standing in the debt market.

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Bonds

A bond is essentially a loan. The investor loans a certain amount of money to an organisation, and the organisation agrees to pay back the loan, with interest, when the bond reaches maturity. The interest rate is an important factor in the value of a bond, along with the term of the bond. True bonds last for over 10 years, but similar debt instruments can last for much less time. Government bonds, especially, can last for only a couple weeks or just days.

Treasury Bonds

Treasury bonds are bonds offered by the United States government. Most governments offer some type of bond. Bonds have the longest terms, followed by notes then bills which have the shortest terms although they all have the same conditions.

Purpose

The government creates bonds for several reasons. The United States government sells short-term bonds to try to influence the economy, circulating more funds among investors. Governments also use bonds to try to raise money for specific projects, just like companies, except government projects tend to be programs or repayment of debt to other countries.

Benefits

The primary benefit of a government bond is its creditworthiness. When the government is solid, the bonds it creates are much safer than any corporate bond; they can, therefore, fetch a higher price on the secondary market and garner more interest among investors. This does not hold true for bonds from governments that experience frequent revolutions or are on the brink of collapse.

Direct Sale

Government bonds in the United States are sold in direct sales to investors. This means there is no intermediary, such as an investment bank or broker (although these organisations may also buy bonds directly). This makes government bonds easier for individual investors to purchase than other types of bonds. The government sells these bonds at regular auctions.

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