The Risks And Rewards Of Government Bonds
If you want a risk-free investment, you will be advised to put your money in government bonds. However, does this hold true all over the world? So the bond might come with a printed promise saying that it is backed by the government but how much weight would that hold?
The thing is to estimate the risk. In you were to buy government bonds in a country where the political situation was volatile to say the least, then does the ‘risk-free' really apply? Investing in a high-risk country might mean profits at times for those who do not mind taking the gamble but for an investor, there is really no place he can go to or appeal in case of any default in payments.
So let's take a look at where you should put your money if you want the low-risk investment with returns that are moderate. Let's look at the bonds issued by the US treasuries. These really give you the lowest risk when it comes to investments – there's never been a defaulted payment to date and it is doubtful whether it will happen in the future either. It is backed by the fact that it the government that issues this bond which can collect taxes or inflate the currency in order to see that the actual repayment cost gets lowered.
You have a wide choice when it comes to these bonds. You have Treasury Bills and you can get them in various maturity periods and interest or coupon rates. They are auctioned on Mondays and $1000 is the minimum purchase price. The ones with the 52-week maturity are sold once every four weeks. The 13 week and the 26 week bills have their interest paid when they mature while the 52 week one has the interest paid half way and at the maturity date.
Then you have Treasury Notes which can be 2, 5 or 10 years and these too are sold at a minimum of $1000. The interest for these is paid twice a year.
Treasury Bonds are also priced at $1000 but they have a maturity period of 3 years and you can buy them in February, August and November. The interest is paid every six months.
How can you calculate the yield? You get this by dividing the interest rate by the price (current). So a $1000 bond paying $46 interest a year is $46/$1000 = 0.046 = 4.6%. The coupon rate is a given but the face value of the bond can change so you could get a different rate each time.
If you are not a risk taker and you like the comfort that a risk free investment gives you, look at government bonds – you'll be glad you did.