A government bond is a type of investment where you loan money to a government in return for an agreed rate of interest over a certain period of time. When a government requires funds for various projects like infrastructure development or deficit financing, it issues bonds. It’s essentially a debt instrument, and the government promises to pay back the principal amount on a specific maturity date. Additionally, periodic interest called coupon payments are also made to the bond holder.
1. What is the primary risk associated with government bonds?
The major risk associated with government bonds is interest rate risk. If rates rise, the prices of existing bonds drop because new bonds are issued at higher interest rates. However, in terms of credit risk, government bonds are typically safer as they are backed by the government.
2. Are all government bonds the same?
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No, not all government bonds are the same. They can vary based on maturity period (short, medium, long-term), issuance currency, and coupon rates. For example, Treasury bills are short-term bonds with maturity less than a year while Treasury notes and bonds have longer maturities.
3. How does a government bond work?
When you buy a government bond, you’re essentially lending money to the government. The government promises to pay you back the full amount on a set date, and also pay you periodic interest payments during the life of the bond. This makes it an attractive investment for those seeking regular income streams.
4. Can you lose money on government bonds?
Yes, it is possible to lose money on government bonds if you sell them before their maturity at a time when bond prices have fallen. However, if you hold the bond until maturity, you are guaranteed the return of your principal, unless the issuer defaults.
5. How do I buy a government bond?
Government bonds can be bought directly from the government through their treasury or central bank websites, or through a broker or a bank. Online trading platforms also allow buying and selling of government bonds.