GOVERNMENT SECURITY AND BONDS

2. About Government Securities 

• Government securities are government debt issuances used to fund daily operations and special infrastructure and military projects.
• They guarantee the full repayment of invested principal at the maturity of the security and often pay periodic coupon or interest payments.
• Government securities are considered to be risk-free as they have the backing of the government that issued them.
• The tradeoff of buying risk-free securities is that they tend to pay a lower rate of interest than corporate bonds.
• Investors in government securities will either hold them to maturity or sell them to other investors on the secondary bond market.

3. Risk of Purchasing foreign government bonds

• The purchase of foreign government bonds also known as Yankee bonds.
• It is more complicated because it is associated with political risk along with currency risk, credit risk and default risk to reap greater yields.
• Some bonds will require the creation of offshore accounts and have high minimum investment levels. 
• Also, foreign bonds fall into the category of junk bonds, due to the risk attached to their purchase.

4. Controlling the money supply

• The Federal Reserve (the Fed) controls the flow of money through many policies, one of which is the selling of government bonds.
• As they sell bonds, they reduce the amount of money in the economy and push interest rates upward.
• The government can also repurchase these securities, affecting the money supply and influencing interest rates called Open Market Operations the Fed buys bonds on the open market, reducing their availability and pushing the price of the remaining bonds up.
• As bond prices rise, bond yields fall driving interest rates in the overall economy lower.
• New issues of government bonds are also issued at lower yields in the market further driving down interest rates.
• As a result, the Fed can significantly impact the trajectory of interest rates and bond yields for many years.
• The supply of money changes with this buying and selling, as well.
• When the Fed repurchases Treasuries from investors, the investors deposit the funds in their bank or spend the money elsewhere in the economy.
• This spending, in turn, stimulates retail sales and spurs economic growth.
• Also, as money flows into banks through deposits, it allows those banks to use those funds to lend to businesses or individuals, further stimulating the economy.

5. Pros and Cons of Buying Government Securities

• Savings bonds offer fixed interest rates over the term of the product. Should an investor hold a savings bond until its maturity they receive the face value of the bond plus any accrued interest based on the fixed interest rate.
• Once purchased, a savings bond cannot be redeemed for the first 12 months it is held.
• Also, redeeming a bond within the first five years means the owner will forfeit the months of accrued interest.

6.2. T-Bills

• Treasury bills (T-Bills) have typical maturities of 4, 8, 13, 26 and 52 weeks.
• These short-term government securities pay a higher interest rate return as the maturity terms lengthen.

6.3. Treasury Notes

• Treasury Notes (T-Notes) have two, three, five or 10-year maturities making them intermediate-term bonds.
• These notes pay a fixed-rate coupon or interest payment semiannually and will usually have $1, 000 face values.
• Two and three-year notes have $ 5, 000 face values. Yields on T-Notes change daily.

6.4. Treasury Bonds

• Treasury Bonds (T-Bonds) have maturities of between 10 and 30 years. These investments have $1, 000 face values and pay semiannual interest returns.
• The government uses these bonds to fund deficits in the federal budget.
• Also, as mentioned earlier, the Fed controls the money supply and interest rates through the buying and selling of this product.