Government Security

What Is A Government Security?

A government security is a tradeable instruments sold by the government. It is called a fixed income security because it earns a fixed amount of interest every year for the duration of the Security.

Government securities are considered to be secure. That is, it is very unlikely that the government will default.

Governments use them to raise funds that can be spent on new projects or infrastructure, and investors can use them to get a set return paid at regular intervals. Once the bond expires, you’ll get back to your original investment. The day on which you get your original investment back is called the maturity date. Different securities will come with different maturity dates – you could buy a security that matures in less than a year, or one that matures in 30 years or more.

Securities that are short term are called treasury bills — with original maturities of less than one year, or long term — called government bonds or dated securities — with original maturity of one year or more. In India, the central government issues both: treasury bills and bonds or dated securities, while state governments issue only bonds or dated securities, which are called the state development loans. Since they are issued by the government, they carry no risk of default, and hence, are called risk free gilt edged instruments.

Example

If you buy a government bond, you buy it for less than face value. When the bond reaches maturity, you receive the face value, or the par value, of the bond.

If you sell the bond before maturity, what you get back depends on the prevailing interest rates. If interest rates have risen since the bond was purchased, the bondholder may have to sell at a discount below par. But if interest rates have fallen, the bondholder may be able to sell at a premium above par.

A bond with a price that is equal to its face value is said to be trading at par – if its price drops below par it is said to be trading at a discount, and if its price rises above par it is trading at a premium.