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Government bonds are those that are issued by a national government, generally promising that they would pay periodic interest payments and repay the face value on the maturity date. They are usually denominated in the country’s currency. The other term for government bond is ‘sovereign bond’. It is technically any bond issued by a sovereign entity that is a sovereign bond but there are terms used to refer to bonds that are issued in a currency other than the sovereign’s currency. If a government or sovereign is close to default on its debt then this is what the media tend to refer to as a sovereign debt crisis.
The first general government bonds were first issued in the Netherlands in 1517 due to the Netherlands not existing at that time, therefore the bonds issued by the city of Amsterdam are considered to be their predecessor, which later merged into Netherlands government bonds. There was an average interest rate fluctuating at around 20% at that time. It was the Bank of England that issued the first ever bond issued by a national government in 1694 to raise funds for the war against France. It was in the form that is known as a tontine. The Bank of England and government bonds were introduced in England by William III of England, also known as William of Orange, who had copied the 7th Dutch Provinces example of providing bonds and raising government debt where he ruled as a Stadholder to finance England’s war efforts.
Government bonds are debt securities issued by a government to maintain government spending. Federal government bonds in the U.S. contain saving bonds, Treasury bonds and Treasury Inflation-Protected Securities (TIPS). It is advised that before investing in government bonds, investors should asses the various risks associated with the country, for instance country risk, political risk, inflation risk and interest rate risk. In saying this, the government does tend to have low credit risks. Most government bonds are backed up by the credit of the U.S. government, default is quite unlikely and government bonds are essentially considered risk-free. Hence the reason, government bonds generate a benchmark against which riskier securities may be compared.
As of 2016, the U.S. Treasury offers two different types of saving bonds. The first one is known as a Series EE bond, sold at half of its face value, which receives a fixed and stated rate of interest. Although, if the bond is held for around 20 years, the face value of the bond will double and result in an effective pre-tax interest rate of around 3.53%. Series I bonds only receive interest based on two figures. One relates to a fixed rate of interest set periodically. The other is a rate tied to an inflation rate intended on a binomial basis.
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