Government bonds, also known as national debt, are debt instruments based on the government's credit and established through the general principles of borrowing, where funds are raised from the public. Government bonds are issued by the central government to raise fiscal funds, representing a debt obligation where the government promises to pay interest over a specified period and repay the principal upon maturity. Since the issuer of government bonds is the state, they carry the highest credit rating and are widely recognized as the safest investment tools. With the repayment of principal and interest guaranteed by government taxation, government bonds are low-risk, highly liquid, and typically offer lower interest rates compared to other bonds.
Classification of National Debt
1:Issuance Method
Book-entry Government Bonds: Debt is not represented by physical securities but is recorded electronically in the accounts of the central clearing institution. These bonds are characterized by easy trading and low costs.
Certificate Government Bonds: Debt is represented by physical securities, and investors hold tangible bonds. Liquidity is relatively poor.
2: Maturity Period
Short-term Government Bonds: Typically have a maturity of less than one year.
Medium-term Government Bonds: Generally have a maturity between 1 and 10 years.
Long-term Government Bonds: Usually have a maturity of more than 10 years.
3: Interest Rate Type
Fixed-rate Government Bonds: The interest rate remains unchanged throughout the bond’s duration.
Floating-rate Government Bonds: The interest rate fluctuates based on a reference rate, allowing it to adapt to changes in market interest rates.
4: Transferability
Transferable Government Bonds: Can be freely bought and sold on the secondary market.
Non-transferable Government Bonds: Cannot be transferred for a certain period and can only be redeemed at maturity.
5: Issuance Purpose
Construction Government Bonds: Issued to support infrastructure projects.
Special-purpose Government Bonds: Issued to support specific projects or sectors.
Purpose of national debt issuance
War Bonds Issued to Raise Military Funds During Wartime
During wartime, military expenditures are enormous, and when other funding methods are unavailable, funds are raised by issuing war bonds. Issuing war bonds is a common practice for governments during wartime and is one of the earliest origins of government bonds.
Deficit Bonds Issued to Balance the National Budget and Cover Fiscal Deficits
Generally, balancing the national budget can be achieved by raising taxes, increasing the money supply, or issuing government bonds. When it is difficult to raise taxes and increasing the money supply is not an option, issuing government bonds to cover the fiscal deficit becomes a feasible measure. By issuing bonds, the government can absorb idle funds from individuals and institutions, helping the country through financial difficulties. However, the issuance of deficit bonds must be kept moderate, as excessive issuance may lead to severe inflation.
Construction Bonds Issued to Raise Funds for National Development
To carry out infrastructure and public facility projects, the government needs a large amount of medium- to long-term capital. By issuing medium- to long-term bonds, short-term funds can be converted into long-term capital for use in large-scale national projects, promoting economic development.
Refinancing Bonds Issued to Repay Maturing Debt
During peak periods of debt repayment, the government may issue refinancing bonds to cover the funds needed to repay maturing debts. This helps to alleviate and spread out the government's repayment burden.
Advantages of Treasury Bonds
High Security: Government bonds are issued by the government and are typically considered one of the safest investments because the risk of government default is relatively low, especially in countries with stable economies.
Stable Returns: Government bonds usually provide fixed interest payments, allowing investors to receive regular income. These returns are relatively stable and less affected by market fluctuations.
Good Liquidity: Government bonds can be traded on the secondary market, meaning investors can sell them when needed, making them relatively easy to convert to cash and providing good liquidity.
Tax Benefits: In some countries, the interest income from government bonds may enjoy tax benefits. For example, in the U.S., interest on government bonds is often exempt from state and local taxes, further increasing the net returns on these bonds.
Inflation Protection: Certain types of government bonds, such as Treasury Inflation-Protected Securities (TIPS), adjust their principal value according to inflation, allowing investors to protect their purchasing power when inflation rises.
Portfolio Diversification: As a relatively safe asset, government bonds can complement higher-risk assets like stocks, helping to diversify risk and stabilize the overall returns of an investment portfolio.
Government bonds are debt instruments issued by the government to raise funds, characterized by high security and stability, and are generally viewed as a low-risk investment option. They provide investors with fixed or floating interest income and have good liquidity, allowing them to be bought and sold on the secondary market. In some countries, the interest on government bonds may enjoy tax benefits, making them suitable for investors seeking steady returns and diversification of investment risk. Additionally, some government bonds offer inflation protection, helping to preserve purchasing power. Overall, government bonds are a reliable investment tool for long-term capital preservation and appreciation.
