Frequently Asked Questions on Government Securities
What is a government security?
A government security or government bond is a low-risk investment opportunity for the public, backed by the government. When you invest in a government security (a treasury bill, note, or bond), you are lending your money to the Government and earning interest in return.
Should I invest in government securities? What is the benefit?
Investing in government securities is a safer investment than investing in risky markets as it is guaranteed by the government. Consider investing in government securities when its interest rates are higher than the rate on your savings account or certificates of deposits at your commercial bank. What’s more, the interest income derived from investments in government securities is tax free.
What are the different types of government securities?
There are three types of government securities offered for investment: treasury bills, treasury notes, and treasury bonds. The difference between a bill, note, or bond is the duration of the loan. The bill is a short-term loan (not more than one year). Notes are a medium-term loan (1-20 years). Bonds are long-term loans (over 10 years).
What is a Treasury Bill?
Treasury bills are discounted securities that mature in less than one year (typically three months); they are sold or auctioned at various interest rates in units of $200 ($200, $400, $600 and so on).
What are Treasury Notes and Bonds?
Treasury notes and bonds are interest-earning securities. Notes mature within one to 20 years, while bonds mature over 10 years. Notes and bonds sold in units of $1000 ($1000, $2000, $3000, and so on).
How do the T-bill auctions work?
Bidders bid on Treasury bills in units of $200. For example, if Bidder A bids 199 for $200 bill, Bidder B bids 198, and Bidder C bids 197, then the government awards Bidder A the highest bid. The bills are then sold at 199. At maturity, the government will repay the bidders $200. The earnings on that investment is $1 (the difference between the bid price and the $200 face value of the treasury bills). Because the return is typically low, individual investors don’t invest in bills. Rather, corporate investors are the primary investors in Treasury bills. Individual investors more commonly invest in notes and bonds.
How do I invest in government securities?