What Are Government Bonds?
A government bond is a financial asset issued by the government to cover its expenditures and obligations.
Governments issue government bonds to raise revenue for specific projects or day-to-day operations. The US Treasury Department auctions off the issued bonds throughout the year. Some Treasury bonds are for sale on the secondary market. Government bonds in the United States have a fairly liquid market, allowing holders to resell them on the supplementary bond market quickly. There are also exchange-traded funds (ETFs) and mutual funds that invest solely in Treasury bonds.
Individual investors who work with a financial institution or a broker can utilize this market to buy and sell previously issued bonds, and treasuries can be purchased through the US Treasury, brokers, exchange-traded funds, and maintaining a portfolio of assets as well.
Government bonds are used to pay government budget shortfalls and obtain cash for various initiatives, including infrastructure investment. On the other hand, the Federal Reserve Bank uses government bonds to regulate the nation’s money supply.
Fixed-rate government bonds are subject to interest rate risk when interest rates rise, and investors own lower-paying fixed-rate bonds than the market. Furthermore, only a few bonds keep up with inflation, which is a measure of price rises throughout the economy.
Some US Treasury bonds are tax-free in both state and federal jurisdictions. On the other hand, international bond investors may be subject to income taxes on their foreign assets.
Most government bonds are guaranteed by the US government’s creditworthiness, which means that default is highly rare and would only happen if the US government could not produce more money to pay off its debt.
Government Bonds Example
For example, there are about three different bonds issued by the US government: Savings Bonds, Treasury Bonds, and the Treasury Notes. Let us assume a young entrepreneur buys saving bonds via the US Treasury’s TreasuryDirect website. She will receive her face value and interest when the bonds finally mature.« Back to Glossary Index