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What are U.S. Government Bonds?

definition

US Government Bonds are debt securities that provide an opportunity to invest in the federal government as it raises capital for spending big and small. Most bonds are issued by the Department of the Treasury at fixed interest rates and carry a significantly lower risk than similar corporate bonds.

🤔 Understanding government bonds

A US Government Bond (also known as a ‘Treasury Bond’) is an opportunity to make a low-risk loan to the federal government. Bonds are used to fund government expenditures, such as infrastructure projects, employees' salaries, military contracts, public health initiatives, among other projects. From the bond holder’s point of view, a US treasury bond is essentially risk-free. The principal of the “loan” and the interest are essentially guaranteed, so long as the US government does not default on its debt — a highly unlikely scenario.

example

A U.S. government bond is issued by the U.S. Department of Treasury. A Treasury bond (or T-Bond) is one example. Purchasing a T-Bond is generally designed to be a long-term investment — They mature in 10 to 30 years. Once purchased, the bond holder receives income in the form of a fixed interest rate (or coupon) every six months. When the bond matures, the investor receives the full amount of the face value of the bond. In the interim, the investor may sell the bond in the secondary financial market, where these bonds are openly traded.

Takeaway

A U.S. government bond is kind of like lending $20 to your parents when they forgot their wallet...

You’re not going to get rich, but — unless they go bankrupt — you’ll get your money back.

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Tell me more...

Are US Government bonds and Treasury Bonds the same?
Are US government bonds fixed-income securities?
How are US government bonds sold?
Do I have to be a U.S. citizen to invest in a US government Bond?
How risky are US government bonds?
Can I sell a US government bond before it matures?
What is an international bond?

Are US Government bonds and Treasury Bonds the same?

Treasury Bonds (or T-Bonds) are a kind of U.S. government bond. They are not the only financial securities issued by the government. Treasury Notes and Treasury Inflation-Protected Securities are two other common bonds issued by the government.

Are US government bonds fixed-income securities?

Yes. In fixed income securities, the holder of the security receives a consistent income in the form of a fixed interest rate (or coupon). A federal government bond from the US government guarantees this.

How are US government bonds sold?

You can buy a government bond issued by the United States Treasury through the department’s website, TreasuryDirect.gov. Or you can use a brokerage firm.

Alternately, as with other classes of assets, you can use a mutual fund or exchange-traded funds (ETFs) to invest in bonds.

Do I have to be a U.S. citizen to invest in a US government Bond?

No. Your ability to purchase US government bonds may be affected by your home government's laws and regulations, but generally, non-US citizens are allowed to buy US government bonds. You will need either a Social Security number or an Individual Taxpayer Identification Number. Similarly, U.S. citizens can also typically invest in government bonds from other countries.

How risky are US government bonds?

Generally speaking, US government bonds are quite safe, since the risk of the United States defaulting on its debt is quite low. Bonds issued by the US government are generally deemed some of the world’s safest.

Can I sell a US government bond before it matures?

Yes, you can. But if you do sell your bonds before they mature, you stand to lose the guarantee of getting paid interest on the face value of the bond. The process is pretty straightforward, but what you will get in return is what another buyer is willing to pay for your bond. This may be more or less than what you originally paid, or what you would have received at maturity.

What is an international bond?

Irrespective of whether you’re in the US or another country, an international bond is described as one issued in a country or currency that is not the investor’s.

What are some examples of international bonds?

If you’re a resident of the United States, an international bond is one that is issued by corporations or governments in other countries and/or in a currency other than the U.S. dollar. International bonds include Eurobonds, foreign bonds, and global bonds.

  • Foreign government bonds: While US. government bonds are very safe, other government-backed bonds — particularly those in emerging markets — can be higher-risk. Bonds in some foreign governments are subject to great risks (compared to US government bonds) from government default, currency depreciation, and other issues of poor governance.
  • Eurobond: A Eurobond is a bond issued and traded in countries other than the country in which the bond’s currency or value is denominated. Though the term includes “euro,” it has nothing to do with the European Union or Euro currency. In this case, euro means external currency. For example, it’s a Eurobond when a German company issues bonds in India denominated in US dollars.
  • Foreign bond: A foreign bond is issued in the domestic market by a foreign bank or corporation in the currency of the domestic country. Consider the example of a Maple Bond— A bond issued in Canada and valued in Canadian dollars by an American company is a foreign bond.
  • Global bond: The global bond is like the Eurobond, but unlike it in one respect: It can also be traded and issued in the country whose currency is used to value the bond. An example of a global bond would be one in which the German company issues bonds denominated in the US dollar and offers the bonds in both Japan and America.

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