What are Government bonds: how you can invest your money in them

A government bond is a debt incurred by the government to fund infrastructure development in its country. The government can borrow money to build schools, hospitals, and roads to accelerate the country's growth. When the government has to increase its spending, it will issue bonds to generate the necessary funds. On the other hand, government bonds are an investment for investors. Investors make a fixed-term loan to the government in exchange for a coupon. A coupon is the interest rate paid on bonds. When the predetermined time expires, the investor receives the initial loan amount from the government. 

Bonds are structured in many ways, with varying tenures and across countries. In the United Kingdom, a bond is known as gilt; in the United States, it is known as treasury bills, treasury bonds, or treasury notes. The bottom line is that the government of the issuing country uses these instruments to raise funds, mainly for infrastructure development. 

Adding bonds to one's portfolio might help maintain it during periods when the investing outlook is uncertain. This is why many investors put their money into government bonds. Many unknowingly invest in bonds since part of their money is put into state-led projects through a company pension or a self-researched investment fund.

How do government bonds work?

You should be aware of many crucial words when purchasing a government bond. Most of these are:

The Principal is the money used to acquire the bond. As a result, it is also the amount owed to you by the government when your bond matures.

The Bond term is the time between the bond's issuance and expiration. The lifespan of a bond might range from one year to more than 30 years.

The Coupon is the interest rate paid on a bond. 

The Yield is the actual return that was made on the bond you hold. If you retain this government bond for the duration of it, its yield will be equal to the Coupon. However, if sold in the secondary market in the middle of the bond's life, the price paid for the bond, rather than the Coupon, will be used to calculate the yield. As a result, bond yields and prices have an inverse relationship. Simply put, when one number rises, the other decreases.

Are government bonds a good investment?

Unlike the stock market, where dividend payments can vary, investing in a fixed income Government bond can give you some confidence about how much your money will earn. 

One of the most significant dangers with government bonds is that you must be confident that the state will not fail in its repayment obligations. 

This has occurred previously. Greece defaulted on its debt in 2012, and most investors consented to lose 70% of what the government owed them. This, however, is a highly unusual occurrence.

Government bonds considered to be the best to buy.

The ideal strategy is to keep an eye out for government bonds issued by economies regarded as robust and likely unable to default on payments. Due to the U.S.'s ability to print money whenever necessary, even in default, it can print money to pay off its debt. This is why the U.S. treasury notes are among the safest bond investment known to investors. 

One way to evaluate a country's creditworthiness is to track its credit rating issued by Fitch, Moody's, and Standard & Poor. The government's likelihood of repaying its debt increases with a higher credit rating.

How to buy Government bonds?

Depending on whatever government bond you want and the type of investor you are, you may purchase a government bond in a variety of methods. For example, buying U.K. gilts directly through the Debt Management Office (DMO) can take much work for a private investor. This is because it only makes this investment available to individuals in the DMO's Approved Group of Investors. You will most likely purchase U.K. Gilts on a secondary market accessible through various investing sites. Exchange Traded Funds (ETFs) indirectly offer another means to invest in government bonds.

Do investors lose money investing in government bonds?

There are two ways an investor can lose money while investing in government bonds.

1. If you retain your bond until maturity, the government may fail on its obligation. In this case, you may only recoup some of your investment.
2. Selling your bond at a discount on the secondary market may result in a loss.

Summary

A government bond is an investment in state expenditure. As a retail investor, you can invest in government bonds through ETFs or purchase them on the secondary market. You can buy a government bond in secondary markets or as an ETF. Still, you must conduct sufficient research to invest in a government bond with a lower risk of default.