Everything about Government Bond totally explained
A
government bond is a
bond issued by a national government denominated in the country's own
currency. Bonds issued by national governments in foreign currencies are normally referred to as
sovereign bonds.
Risk
Government bonds are usually referred to as
risk-free bonds, because the government can raise taxes or simply print more money to redeem the bond at maturity. Some counter examples do exist where a government has
defaulted on its domestic currency debt, such as Russia in
1998- the
"ruble crisis", though this is very rare.
As an example, in the US,
Treasury securities are denominated in
US dollars and are the safest US dollar investments. In this instance, the term
risk-free means free of
credit risk. However, other risks still exist: such as currency risk for foreign investors (for example non-US investors of US Treasuries would have received lower returns in
2004 because the value of the US dollar declined against most other currencies). Secondly, there's
inflation risk - in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation outturn is higher than expected. Many governments issue
inflation-indexed bonds, which protect investors against inflation risk.
An example of somewhat risky bonds issued by a government can be given with countries that have less than perfect capabilities of conducting financial policies. Such an example is
Bulgaria due to its being dependent on the world economy and economic institutions much more than, say, the US. Some of this country's bonds were only given an A-scale rating after 2004. As of February 2006,
Standard & Poor's rates Bulgaria's long-term debt denominated in domestic currency at BBB+. Moreover, this rating is the result of almost a decade of constantly decreasing risk (and increasing ratings). We should also note that this country's short-term debt is in fact currently rated A.
Issuance
Government bonds are issued through agencies that are part of the government's treasury department, for example
Further Information
Get more info on 'Government Bond'.
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