Government Bond

A Government bond has no credit risk and promises to pay a guaranteed principal amount and an interest rate over a time frame. Find out all about it.

A government bond (GB) is issued by a national government promising to pay interest amounts and a principal amount (known as the face value) by a certain date. They are also known as debt investments where an investor lends a fixed amount of money with an interest rate to a country or a company. The bonds are usually in the countries own currency. Bonds issued in foreign countries in the national or foreign currency are known as sovereign bonds.

History

The first GB ever issued was to raise money to fund a war against France by the Bank of England in 1693. It was referred to as a tontine (an investment plan to raise cash). Following that governments in Europe began to issue perpetual bonds (bonds with no maturity date) to fund wars and various government spending. In the 20th century, issuance of perpetual bonds ceased and ones with a limited time duration commenced.

Credit risk

GBs are well known to be risk free bonds because the government can always raise taxes or print additional currency to pay off the bond at the maturity date. There have however been some rare occasions where a government has defaulted such as Russia in 1998 with the Ruble Crisis. It is rare to find a government default.

Inflation risk of the Currency

In the US, Treasury securities are bonds issued by the government and are in US dollars and are generally known as “risk free” or free of credit risk. There is however a couple of risk factors to become aware of. For example foreign investors can be affected if the value of the US dollar lowers from the rest of other currencies as it did in 2004. This is known as currency risk. A second risk factor is known as inflation risk where the capital invested and repaid at the maturity will have less purchasing power if inflation has risen higher than expected or the bond interest rate. A remedy for this is the government issued inflation-indexed bonds which increase the bond’s interest rate as the inflation rate of the economy increases thereby protecting the investor.

Double Digit interest rates

If GBs have such a high safety net by the nature of their government guarantee and generally lower yields, then the drive should be to where the highest interest rate (coupon) is being paid right? You decide: In the US you can expect to get treasury securities at coupon rates in the low single digits. Sovereign Government bonds from an emerging market such as the Federal Government of Nigeria is awarding its GBs at 11-12% for 3, 5, 7 and 10 year maturity terms. To get access to licensed Primary dealer Market Makers to facilitate double digit sovereign bonds in emerging markets, Contact our adept team today.


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