Government Security — is a bond or another debt commitment provided by the state or state agency. The state guarantees the payment of this bond for a certain indicated period. Government securities are considered a low-risk investment because they are issued by the state and insured by taxes.
What is Government Security
The market of government securities is an important part of the stock market in any country. This market effectuates the centralized borrowing of temporarily free funds from commercial banks, investment and financial companies, various enterprises, and individuals. Government securities are reliable and liquid assets. They are used to support the liquidity of the balance sheet of financial and credit institutions. Funds are received from the sale of government securities. They allow the authorities to cover the state budget deficit without inflation.
The government securities have several features:
- Issue date — the price of a security at the moment of issue.
- Coupon rate — the interest rate paid by the issuer to the holder of debt securities. The coupon rate can be fixed or floating. The floating rate is stable for a defined period and depends on short-term interest rates.
- Maturity date — a date when the issuer pays the main sum to the holder.
- Yield-to-Maturity — the return on investment in a bond in case the buyer intends to hold the bond until maturity.
Here are the main types of government securities:
Treasury bills (T-bills). Treasury bills are zero-coupon securities. This type of security is placed on a competitive basis through auctions. Treasury bills are zero-coupon securities. Income appears from the sale of a security at a discount to its face value. Also, they can be sold on the secondary market before maturity. The Federal Reserve uses these securities in the conduct of national monetary policy.
Cash Management Bills (CMBs). These government securities are intended to cover the temporary government budget deficit. CMBs are issued by the Treasury when cash balances decline, and it is necessary to raise funds for several days. The circulation period of bills varies from 9 to 20 days. The notification of their forthcoming placement is made ten days in advance. CMBs should be paid out from federal funds.
Savings bonds. This is governmental security that can’t be bought or sold by anyone or any government. This form of savings is registered to the holder (owner). He receives the compensation (delivery of income) on these bonds. These bonds are highly liquid. This means they are easily convertible into cash and are also redeemable at the first request of the holder, according to face value.
Floating Rate Notes (FRN, Floaters). This is a bond whose interest payment is tied to a predetermined financial ratio. It could be the refinancing rate of the central bank or the average interbank interest rate. The use of bonds with floating interest rates enables investors and borrowing companies to reduce financial risks associated with changes in the borrowing market. Besides, floaters protect investors from losing some of their potential profits.
Treasury Bonds (T-bonds). This is a type of fiat money issued by the U.S. Treasury to pay for the spending of the government. The circulated short-term obligations also belong to the T-bonds. This is a public debt financing tool. The repayment period is between twenty and thirty years. Treasury notes pay a coupon rate twice a year, with the final coupon paid on the maturity date and an amount equal to the face value of the note.
Treasury Notes (T-Notes). These are the U.S. Treasury coupon securities with average maturity of 1 to 10 years and a fixed rate. Treasury notes are an important asset. They are the most frequently mentioned security when assessing the dynamics of the American government bond market. They reflect the position of the market concerning macroeconomic expectations. Notes are also the safest asset on the market for medium and long-term liabilities. That’s why they have lower yields than corporate or government agency bonds with similar maturities.
Treasury Inflation-Protected Securities (TIPS). These are the American government bonds that are protected from inflation. The TIPS inflation protection mechanism provides for the indexation of the face value of the bond to the consumer price index (Consumer Price Index, CPI). Thus, when CPI rises, the TIPS nominal increases proportionally. Also, when CPI falls, it decreases proportionally. This process reflects the rate of official inflation/deflation in the United States. In addition, the payment of a nominal value not less than the initial one is guaranteed by the state. Therefore, even in the event of deflation throughout the entire circulation period, the holder receives the initial cost of the bond, and they won’t suffer a nominal loss.
Purpose of Government Security
The acquisition of government securities is a simple way to increase money. It’s a simple, liquid, and low-risk financial instrument. The essential purpose of the issue of government securities is to attract funds for the development and social projects of the country. The interest of buyers of government securities is also understandable: they want to receive a guaranteed income. Such financial instruments are mutually beneficial and reliable for both parties to the transaction.
The emission of government securities allows the state to solve several important issues:
- cover the government deficit;
- cover the cash deficiency in a budget;
- attract the financial resources for the implementation of large projects;
- raise funds to pay off the debts on other governmental securities.
Investment in government securities also has a list of pros and cons. So it is an individual who decides whether it is worth the time.
Advantages and disadvantages of investment in government securities: