Government Finances: The Pros And Cons Of Government Bonds

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Government bonds can be described as a debt security issued by a government to sustain government expenses. Government debt is money owed by any level of government and is financed by the full faith of the government. The terms on which a government can sell bonds depend on how creditworthy the market considers it to be. Government bonds are seen as a good way of preserving capital while generating a reticent return every year. Most governments around the world rely on the issuing of new bonds to cover their deficit spending. The risk-free rate is the yield on high quality government bonds. For most investor, the US Treasury yield is the risk-free yardstick that is not in favor of which other assets can be measured. Many government bond issues…show more content…
Saving bonds are the safest investment there is, since they’re supported by the government, and they’re assured not to lose principal. They don’t offer extraordinary yields, but that isn’t the point. If you want to keep your money completely safe, savings bonds are the best choice. They’re easy to buy and they’re tax-free on both the state and local levels. However, one disadvantage is that they aren’t as liquid as some other types of investments as you can’t cash them in within the first year of their lifespan, and if you have to cash them in within the first five year you will pay a three-month interest…show more content…
Risk-free rate is the return for systematic risk which cannot be removed by holding a diversified portfolio. A risk free bond is a theoretical bond that repays interest and principal with total confidence. In practice, government bonds are treated as risk-free bonds as government can raise taxes or indeed ‘print money’ to repay their domestic currency debt. For instance, US Treasury notes and US Treasury bonds are considered risk-free bonds, even though investors in US Treasury securities do face a negligible amount of credit risk. An option used to estimate the risk free rate is the inter-bank lending rate. It appears to be premised on the basis that these institutions benefit from an inherent guarantee, underpinned by the role of the monetary authorities as 'the lending of last resort.' A remark can be applied to banks as a substitute for the risk free rate if there is any perceived risk of default implicit in the interbank lending

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