Government Bonds are also preferred as Government Debts, which are issued by the Government to raise funds for their spending. It is the same way you borrow money from any individual at some interest rate, in a similar way government bonds work. Government raises funds via issuing bonds for interested investors and with this type bonds risk factor is low and the interest rate is relatively high.
Above we state that government bonds are considered risk-free bonds because it is expected that the government is able to raise funds by taxes or produce extra money in order to redeem the government bond at the time of maturity. Some advantages of Government Bonds-
- As we know government bonds are the safe bonds and investment in these bonds are also known as safe investments.
- Via these bonds, an individual can save tax as compared to other bonds.
- Basically traded in highly liquid or we can say they are easily transferable.
- These rates will not fluctuate, it provides fixed rates so that your budget will not disturb.
Disadvantages of Government Bonds-
- Sometimes Government bonds rate declines at the time of return.
- Only Selective bonds provide protection at the time of inflation and it is possible that bonds interest rate will increase.
- There are very fewer opportunities to gain capital via government bonds
Control of the Money Supply
It is well known that the economy of the entire country is run by Government and if there is any inconsistency in the money market occurs then the government has to control the money supply. Fund shortage is control by issuing various government bonds to control country’s money supply. It is achieved by a particular process–
- In a primary phase, government repurchases its own bonds.
- After that money rotation in the market rises, now sellers are receiving funds.
- Now gradually capital is deposited in the bank, monetary organizations apply the money multiplier to increase the currency supply.
Types of Treasury Saving Bonds-
- According to U.S. Treasury, there are 2 types of Saving Bonds-
- Series EE bond- These bonds earn a static rate of return for the full life of the bond and its interest is calculated compounded monthly from the first day of the month. These are low- risk bonds and often used in the arena of education, retirement etc.
- Series I Bonds these bonds are also low-risk bonds. Only the feature that distinguishes it from Series EE bond is its interest rate earned. Its interest rate comprises of 2 components that are: fixed and variable rate.