Capital Is Invested
An investor purchases a government security and provides capital to the issuer according to the terms of the offering.
GOVERNMENT BONDS
Government Bonds Explained How They Work and What Investors Should Know
Understand government bonds, how they generate interest income, how maturity and yields work, the risks investors should consider, and where government bonds may fit within a diversified portfolio.
Interest Income
Government Issuers
Maturity & Yield
GOVERNMENT
BOND
FIXED INCOME
Government
Maturity
Yield
UNDERSTANDING GOVERNMENT BONDS
What are government bonds?
Government bonds are debt securities issued by governments to raise money for public spending, infrastructure, refinancing existing obligations and other government requirements. When an investor purchases a government bond, the investor is effectively lending money to the issuing government under a defined set of terms.
Those terms can specify the bond's maturity date, interest payment structure, face value and other conditions. Depending on the type of government security, interest may be paid periodically or the investment may be structured differently.
Government bonds are often discussed as fixed-income investments, but they are not completely free from risk. Their market value can change before maturity, and the level of risk depends on the issuing government, interest-rate environment, inflation, currency exposure and other factors.
A government-issued debt investment
Investors provide capital under defined terms that may include interest payments and a stated maturity.
HOW GOVERNMENT BONDS WORK
A simple look at the bond investment process.
Understanding the basic structure of a government bond can make it easier to evaluate its potential role, expected payments and risks.
Interest May Be Paid
Depending on the security, investors may receive interest payments based on the bond's stated terms.
Market Value Can Move
If a bond is traded before maturity, its market price may change because of interest rates, demand and other market conditions.
Maturity Is Reached
Subject to the issuer meeting its obligations, the principal is generally due according to the security's maturity terms.
FIXED INCOME BASICS
Why investors consider government bonds.
Government bonds can play different roles in an investment portfolio. Some investors consider them for income, diversification, liquidity or as part of an allocation designed around a specific time horizon.
The appropriate role depends on the individual security and the investor's objectives. A government bond should therefore be evaluated based on its maturity, yield, interest-rate sensitivity, issuer and the investor's broader portfolio.
Potential interest income
Portfolio diversification
Different maturity options
COMMON GOVERNMENT SECURITIES
Government debt can take different forms.
Government debt markets include securities with different maturities, structures and objectives. Understanding these differences can help investors compare opportunities more effectively.
01
Treasury Securities
Government debt securities can be issued with different maturities, allowing investors to select securities based on their timeframe and investment objectives.
02
International Government Bonds
Government debt issued outside an investor's domestic market can introduce additional factors such as currency and country-specific risks.
03
Inflation-Linked Securities
Some government securities are structured so that certain payments or principal amounts are connected to inflation measures.
BEFORE INVESTING
Look beyond the interest rate when evaluating a government bond.
A bond's stated interest rate does not tell the entire investment story. Investors should consider the security's price, maturity, yield, liquidity and sensitivity to changing market conditions.
It is also important to understand whether the security is intended to be held until maturity or may need to be sold earlier. Selling before maturity can expose an investor to market price movements.
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KEY FACTORS TO CONSIDER
Six factors that can shape bond investment decisions.
Issuer
Consider the government or entity issuing the security and the factors that may affect its ability to meet its obligations.
Maturity
The maturity period determines when the security's principal is generally scheduled to be repaid.
Yield
Yield helps investors evaluate the return associated with a bond relative to its price and payment characteristics.
Interest Rates
Changes in market interest rates can influence the price of existing bonds and their attractiveness relative to new securities.
Inflation
Inflation can affect the purchasing power of future interest payments and principal received from fixed-income investments.
Liquidity
Investors should consider how easily a security can be sold and whether its market value could differ from expectations.
GOVERNMENT BOND RISKS
Government bonds can have lower risk in some cases, but they are not risk-free.
The risk profile depends on the specific security, issuer, maturity, interest-rate environment and other market conditions.
Interest Rate Risk
Bond prices can change when market interest rates move. Longer-term securities can be particularly sensitive to rate changes.
Inflation Risk
Rising prices can reduce the purchasing power of future fixed interest payments and principal.
Currency Risk
International government bonds can expose investors to changes in exchange rates when the investment is denominated in another currency.
Liquidity Risk
Some securities may be more difficult to sell quickly at a desired price, particularly during stressed market conditions.
PORTFOLIO ROLE
Where can government bonds fit within an investment portfolio?
Investors may use government bonds for different reasons. Some may seek regular income, while others may use bonds to diversify a portfolio that also contains stocks, ETFs or mutual funds.
The role of a government bond depends on the investor's financial goals, time horizon, liquidity requirements and tolerance for investment risk. A short-term government security may serve a very different purpose from a long-term bond.
FIXED
INCOME
Government bonds can serve different portfolio purposes depending on their structure, maturity and the investor's objectives.
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FREQUENTLY ASKED QUESTIONS
Questions investors often ask about government bonds.
Government bonds are debt securities issued by governments to raise capital. Investors provide money to the issuer under defined terms that may include interest payments and a stated maturity.
An investor purchases a government security and provides capital to the issuer. Depending on the security, the investor may receive interest payments and the principal is generally due according to the maturity terms.
Yes. Government bond prices can change before maturity. Interest-rate movements, inflation expectations, market conditions, liquidity and other factors can affect market value.
Maturity is the date specified in the security's terms when the principal amount is generally scheduled to be repaid, subject to the issuer meeting its obligations.
Bond yields can be influenced by market interest rates, inflation expectations, economic conditions, investor demand, maturity and perceptions of the issuer's creditworthiness.
No investment is automatically suitable for every investor. Government bonds should be evaluated in relation to financial goals, time horizon, liquidity needs, risk tolerance and the characteristics of the specific security.
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