Government securities are debt instruments issued by the U.S. government to finance various public spending initiatives. These securities include Treasury bills, bonds, notes, and savings bonds, and are considered the most creditworthy of all debt instruments. This unparalleled level of security is due to the backing by the “full faith and credit” of the U.S. government.
Types of Government Securities
Treasury Bills (T-Bills)
Treasury bills are short-term securities that mature in one year or less. They are sold at a discount to their face value, and the investor receives the face value upon maturity.
Example
If you purchase a $10,000 T-bill for $9,800, you would gain $200 when it matures.
Treasury Notes (T-Notes)
Treasury notes have maturities ranging from two to ten years. They pay interest semi-annually and return the principal amount at maturity.
Treasury Bonds (T-Bonds)
Treasury bonds are long-term investments with maturities of 20 to 30 years. Like T-notes, they pay interest semi-annually and return the principal at maturity.
Savings Bonds
Savings bonds are non-marketable securities that offer a fixed interest rate over a specified period. There are different types, such as Series EE and Series I bonds.
Historical Context
Government securities have been a cornerstone of American public finance since the country’s early years. The first U.S. bonds were issued during the Revolutionary War to fund military expenses. Over time, the range of securities has expanded to include the modern instruments we recognize today.
Special Considerations
Credit Quality
Government securities are considered virtually risk-free because they are backed by the unconditional commitment of the U.S. government. This makes them particularly attractive to risk-averse investors.
Tax Implications
Interest income from Treasury securities is subject to federal income tax but is exempt from state and local taxes.
Marketability
Except for savings bonds, most U.S. government securities are highly liquid and can be easily bought or sold in the secondary market.
Comparisons
Government Securities vs. Corporate Bonds
Government securities are considered safer than corporate bonds, which carry a higher risk of default. As a result, the interest rates (yields) on government securities are generally lower compared to corporate bonds.
Government Securities vs. Municipal Bonds
While both types offer tax advantages, municipal bonds are issued by state and local governments. Municipal bonds may carry a higher risk compared to Treasury securities but often offer tax-free interest at the federal level, and sometimes at the state and local levels.
Related Terms
- Yield: The annual rate of return on a bond, expressed as a percentage of its current market price.
- Coupon Rate: The interest rate that the issuer of a bond promises to pay bondholders.
FAQs
Are government securities a good investment?
How do I buy government securities?
What happens if the government defaults?
References
- U.S. Department of the Treasury. (n.d.). Treasury Securities & Programs. Retrieved from treasury.gov
- Federal Reserve Bank. (n.d.). Understanding Treasury Securities. Retrieved from federalreserve.gov
Summary
Government securities, including Treasury bills, notes, bonds, and savings bonds, represent some of the safest investment vehicles available. These instruments are backed by the full faith and credit of the U.S. government, making them highly attractive for risk-averse investors. Understanding the various types, their historical context, special considerations, and comparative characteristics can aid individuals in making informed investment decisions.
