Introduction to government bonds

Government bonds can accumulate debt just like their citizens. When a federal, state or local government needs to raise funds to support a new project or cover debt to other governments, they may issue security bonds to investors. This allows them to collect the money they need immediately while agreeing to pay the money back plus interest over a specific period of time. It’s much like securing a loan to buy a car, except governments generally borrow much larger sums of money and the structure of the loan is different.

Government bonds

Government bonds structure

Government-issued securities will pay the investor interest on a structured basis as long as the government holds their money. Once the bond’s maturity date is reached, the full amount borrowed is returned to the investor. With this repayment structure, your profit is the sum of interest payments received before the maturity date.

While you can make more money by investing in bonds with maturity dates 10 or more years in the future, the level of risk goes up with those longer terms. In most cases, governments are more stable than companies in which you may buy stock, so these bonds are low-risk opportunities. That doesn’t mean you shouldn’t consider the stability of the government you’re investing in before buying your bonds.

Types of government securities

“Government bonds” is an umbrella term used to group a variety of security types together. If it’s issued by a government entity, it falls within this group. One of the most well-known forms of government bond in the United States is the savings bond. This type of security is sold by banks to customers interested in earning interest on their money without risking a loss. The interest earned throughout the life of the bond is tax-free income, and that makes this one of the most popular investments for those saving for retirement or other future expenses. 

Treasury bonds are another form of government security issued in the U.S., but they come with a minimum maturity period of 10 years. They’re issued by the U.S. Treasury Department and are considered one of the safest ways to invest money in the U.S. if you’re willing to accept heightened risk due to the length of the loan.

You will find other government-issued bonds offered under a variety of names, depending on the government borrowing the money and the specific department issuing the bond. When dealing with bonds outside of the United States, make sure to learn how the borrowing country structures their loans in case it differs from U.S. government bonds.

Where to buy

You can buy government bonds directly from the government or through your bank, depending on the type of bond in which you choose to invest. It’s now possible to buy many bond types online, but make sure you’re dealing with a legitimate bank or government department authorized to issue the bonds you want to secure. Even the Treasury department is now selling bonds online, but make sure you’re working through the official U.S. Treasury department website.

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