Shawn has a masters of public administration, JD, and a BA in political science.
Governments need money to operate and, just like people and businesses, they will borrow money when needed. In this lesson, you'll learn about government securities.
What is a Government Security?
A government security is a bond or other type of debt obligation that is issued by a government with a promise of repayment upon the security's maturity date. Government securities are usually considered low-risk investments because they are backed by the taxing power of a government. In fact, investment in U.S. treasury securities is probably the safest investment that can be made.
Why Are They Issued?
Government securities are usually issued for two different reasons. The primary reason that most government securities are issued is to raise funds for government expenditures. The federal government issues treasury securities to cover shortfalls (deficits) in its annual budget. Additionally, cities will often issue bonds for construction of schools, libraries, stadiums, and other public infrastructure programs.
A central bank of a country, such as the U.S. Federal Reserve, will sell debt securities for another reason: to control the supply of money in an economy. If the Federal Reserve wants to slow the growth rate of money in the economy, it will sell government securities. This means that it is sucking up dollars from the economy and replacing them with government securities, which results in a slowing of the rate of growth in the money supply. Slowing the rate of money's growth in an economy will help keep inflation under control.
Types of Government Securities
There are many types of government securities. Let's take a look at them and see how they differ.
Treasury bills are short-term securities issued by the federal government. Their maturity periods range from days to 52 weeks. These securities are sold at a discount rate and will be paid at face value, which is how the investors make their money.
Treasury notes are government securities with maturity periods longer than treasury bills. Their maturity periods can be two, three, four, five, seven, and ten years. Interest is paid every six months.
Treasury bonds are long-term investments with a maturity period of 30 years. Interest is paid every six months.
Treasury inflation protected securities (TIPS) are securities that are protected from inflation. The principal increases, if there is inflation, and decreases, if there is deflation. They have maturities of five, ten, and thirty years. Interest is paid every six months.
I savings bonds are low-risk investments that can be purchased for as little as $25. They are protected against the effects of interest.
EE/E savings bonds are low-risk investments that pay a fixed rate of interest if purchased after May 2005. These are the classic 'savings bonds' that your parents or grandparents gave you for a present in lieu of toys (probably to your chagrin).
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Municipal bonds are government securities issued by a state or local government that are usually issued to support special projects like building schools and other public buildings. There are two general types of municipal bonds. Public purpose bonds are tax-exempt, while private purpose bonds are taxable, unless specifically exempted from taxation. The tax-exempt status means that the interest earned on the bonds is not subject to taxation, which can be attractive to certain investors.
Let's review. Government securities are a type of debt obligation, such as a bond, that is issued by a government to investors. Since the securities are backed by the tax authority of the government that issues them, they are usually considered a low-risk investment. Governments issue them to cover shortfalls in revenue or to fund special projects like schools. Central banks will also issue government securities in an attempt to reduce the rate of growth in the money supply to control inflation.
Examples of federally issued securities include treasury bills, treasury notes, treasury bonds, TIPS, I savings bonds, and EE/E savings bonds. Municipal bonds are debt obligations issued by state and local governments, and they are usually issued to fund special projects and are often tax-exempt.
Government Securities: Why & Types
Why Government Securities?
To raise funds for government expenditures
To control supply of money in an economy
Types of Government Securities
Explanations/Maturity and/or Interest
Short-term securities issued by the federal government; up to 52 weeks
Securities with longer maturity periods than treasury bills; up to ten years, interest paid every 6 months
Long-term investments up to 30 years; interest paid every 6 months
Inflation-safe securities of 5, 10 and 30 years; interest every 6 months
I savings bonds
Low-risk and cheap investments; safe from the effects of interest
Classic savings bonds; low-risk and fixed-rate interest
Securities issued by cities or states; tax-exempt (earned interest isn't taxed) public-purpose bonds & taxable private-purpose bonds
When you reach the end of this lesson, you could discover an enhanced ability to:
Define the term government securities from memory
Specify the two reasons that they're issued
List the types of securities offered by the U.S. government
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