A government security is a bond permitted by the government whose purchase is a promise by the government to repay the debt upon maturation of the bond. Bonds are considered low risk because they are backed by the credit of the United State’s which can tax consumers and taxpayers to repay the government security. Government securities are sold in auctions to investors who later buy and sell these securities. The availability of government securities affect the economy, interest rates, the value of stocks, and money supply.
Fundamentals go Government Securities
The branch of government that is responsible for issuing government securities via auctions to institutional investors is the Treasury Department, which includes both the selling and buying of securities. Retail investors on the other hand purchase government securities straight from the department of treasury’s online webpage, or through brokers as well as banks.
Major types of Government Securities
Securities HH Bonds- Bond which can be bought when a matured Series EE bonds is required. Additionally, such a transaction may not be processed and fall through if buying with cash.
Series EE Bonds- Identified as saving bonds. Bought straight from the United States government at a discounted rate vs market value, generally with savings as high as 50%.
Risks & Benefits
The benefits of government securities include the exemption of local as well as state taxes. This makes government bonds more favorable for those who invest and party’s whose income falls under a high tax bracket. The downside of government securities include low rates of return, along with the fact government securities not always secured against high inflation. Furthermore, the purchase of government securities is best for long term investment due to the minimal rate of capital gains.
A significant percentage of investors store government securities via Mutual Funds.
Despite the fact government securities frequently have minimal risk for financial ruin, varying interest rates in the market can affect the value of the government security. Even though the constant changes in interest rates can affect the value of the security, in the long term there is little to no risk. The fact that the government has the ability to back the security ensures the integrity of the bond and its liquid nature due to its ability to conveniently sale the security at anytime.