Government bonds are an investment like and unlike any other bond.
Like corporate bonds, which may be used instead of public stock offerings to fund corporate expansions, U.S. government bonds are issued to, “help to finance the federal government”, which as you know is a vast enterprise. As long as elected government officials refuse to cut spending, or raise sufficent revenue by raising taxes, bonds will and must be sold by governments to meet their expenses. Fortunately, in the realm of government bonds, those issed by the United States are “…considered to be some of the safest you can buy” – at least for the foreseeable future.
As reflected by the recent public-government debt crisis in the nation of Greece not all governments are as reliable and secure in the prospect of the government paying or repaying their debts. However, in most cases, government bonds tend to be the safest type of bond offered anywhere, in any market.
To purchase a treasury bond an investor pays an initial price that can be at, higher or lower than the face value of a bond.
After purchase a treasure bond will “…pay interest every six months until they mature”. T-bonds have a set “maturity”, that is, a time of up to 30 years after which an invertor holding the T-bond is “paid its face value”.
The same set of facts that offer security to investors simultaneously limit or reduce the investor’s profit margins when investing in government bonds. The high level of security (in the principal or face amout of government bonds) is attributable to the bond’s backing by the “full faith and credit” of the United States taxpayers. As in the case of most investments the trade-off for security or “low risk” is moderate returns.
Government bonds, because of their high level of security, can be used to diversify investment portfolios and minimize risk for those looking to preserve capital, that is, one’s assets. This may be particularly true for babyboomer or those approaching retirement and wishing to have greater certainty about their ability to fund the lifestyle in retirement.
Another drawback, besides modest yields, is the long time it takes for a bond to mature since the principal investment cannot be regained until the bond is retired at its maturity. This can be up to 30 years down the line unless the bond is resold.
The trading of bonds, pending maturity, will likely result in a transaction fee paid to a broker or a bank, effectively reducing the money that they would otherwise have been received if the investor held the bond until maturity.
There are even new “…inflation-indexed bonds (I-bonds) which were created to reassure investors by helping to protect I-bond purchasers from the effects of future inflation. I-bills are ideal for those who are content with safe, small returns, regardless of inflation.
If interested, one can, “purchase some U.S. bonds through brokers and banks or directly through the Federal Reserve Banks”.
By – Domenic Gabriella