Government bond, also known as treasury security, can be considered as the safest and the most conservative investment tool, attracting both individual investors and institutional investors.
Government bond is backed by U.S. government, which promises investors that they will get their principal and interest back in future. We can divide government bonds into three categories based on their length of maturity. They are T-Bills, T-Notes, and T-Bonds.
T-Bills have the shortest length of maturity and are issued with a discount compared with its par value. Some of them are auctioned regularly, including the bills with the term of 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks while some of them are auctioned irregularly such as cash management bill and they are the ones that can be found both in capital market and money market. Note that among all the T-Bills, only the one which term is 52 weeks is auctioned once a month while the others are all auctioned once a week.
T-Notes have the middle length of maturities and the bills’ term are 2,3,5,7 and 10 year. Among these, the 10-year maturity is offered quarterly (in February, May, August, and November) while the others are offered monthly. If the investors choose T-Notes, they can purchase them at par value of $1,000 and gain the same principal on maturity date. Meanwhile, they can gain their interest semiannually.
T-Notes are the same as T-Notes, except that their length of maturity is 30 years.
Pros and cons of government bonds
- Investors can get their principal and interest for sure since government bond is backed by U.S. government.
- Investors can buy and sell government bonds virtually.
- Investors can get the remaining interest and the bond’s face value if they hold the bonds till maturity day.
- Government bonds are tax-free for certain states, thus investors can enjoy tax exemption.
- Government bonds vary with inflation and interest rates.
- Government bonds do not have call features thus the issuers cannot buy the bonds back if the interest rate go down.