Everyone wants to invest their money where they could get guarantee of repayment of principal amount with some profits. In today’s dynamic world where situation changes in minutes, it is difficult to find such investment scheme.We need not worry about this issue in government bonds. Government wish to raise or borrow money from the people either to fund their expenses or to control inflation in the country.
A government body may raise money on a stock exchange or by inviting invitations from the public by issuing tenders.The investor then nominate the price at which they are interested to buy the bond. An issue by tender is just like auction. For eg, the government body declares a floor price of $100 and the investors bid the price above it.The government will then determine the price and will sell this to the investor making the highest bid.
Another example to explain the concept of bonds is, suppose an investor purchases bonds worth $1000 redeemable at 110% in six years time. The investor will receive a coupon payment of 5% p.a . In this case the investor will receive $50 at the end of each year and $1100 after six years.
In some bonds have variable redemption dates,i.e, the investor himself can choose the date of redemption of bonds within the certain time period given. Some government bodies issue bonds at a discounted rate with no coupon payment. The discount earned is the income from that bond. Such bonds are known as Zero Coupon Bonds.
Bonds issue by the government bodies are the most secure and risk free form of investment.However, with this security comes a disadvantage of low returns from the bonds.The coupons of these bonds are effected by inflation therefore, they are generally linked to price indexes to reduce the effect of inflation.
In most of the developing nations bonds form the largest, most important and liquid form investment.If we have proper knowledge about them, an investors can earn huge profits from them.This was all from my side about the government bonds. I hope this article helps you to gain some knowledge about them.