Government Bonds

Government bonds are financial instruments, whereby the government owes the bondholder a debt and pays interest or repays the principal sum at a later point in time. A bond is a formal agreement, with borrowed money being repaid with interest at set periods. The term “sovereign bonds” refers to bonds issued in a foreign currency. The concept usually denotes bonds that are issued in a foreign currency, with the total amount owed to bond holders referred to as sovereign debt. These types of bonds are typically issued by countries with unstable exchange rates and unpredictable or very high inflation. In this case, bonds are denominated in a more stable currency.

Government bonds, on the other hand, are denominated in the national currency of the respective country. The English were the first to issue a government bond with the purpose of raising money for a war against France. This occurred in 1693 in the form tontine, a scheme for raising funds which combines some features of lottery and group annuity.

This type of bond is known as risk-free because the government can repay the principal at maturity by raising taxes. Maturity refers to the date the final payment is due.

Very rarely has a government proved unable to repay debt on government bonds. This occurred in Russia in 1998, the year of the ruble crisis. Other risks with government bonds include inflation and currency. Inflation risk exists when the buying power of the principal amount repaid at maturity is lower than expected, if inflation has risen. Inflation-indexed bonds are a way to avoid such risk. As the name suggests, the principal sum of these bonds is indexed to inflation, i.e. it is set up with consideration of the anticipated inflation growth. In general, currency risk is present for foreign investors when government bonds get lower returns because the value of the national currency has dropped against other currencies.

In the United States, government bonds represent debt on top of the existing debt. In exchange for bonds, the US government receives fiat currency that is in the denomination value of the bonds. A popular type of US government bond is the so-called gilt. Gilts yield a fixed interest rate twice a year. One problem is that you may not always get your capital back in full, as they are purchased and sold on the stock market, whereby their price varies. As the same time, government bonds carry low risk, as they are guaranteed by the government.

The Canadian government bonds are guaranteed by the Canadian government and offer attractive returns to investors. They are practically risk-free if they remain in possession of the holder until maturity. Terms of ownership range from one to thirty years. Canadian government bonds are the safest type of investment in Canada. They guarantee fixed interest until repayment of the full principal at maturity. If one does not wish to hold them until then, they can be sold at market value at any point in time. They can be purchased in US or Canadian dollars and the minimum investment (in principal) is $25,000 or $5,000 respectively.

Bonds issued by EU and non-EU countries facilitate the diversification of investments and the exposure to world markets, whose economic and financial cycles are different from those in the US and Canada.