What Is a Government Paper?
Government paper is a debt security that is issued or guaranteed by a sovereign government. Government paper of a nation is usually perceived as the least risky class of debt securities in that country and will offer investors the lowest yields compared with debt of a similar maturity issued by other entities in that nation.
- Government paper is a colloquial term for debt securities issued by governments, usually national governments.
- Because of their powers to tax or create legal tender, governments are generally viewed as presenting less default risk to lenders and the interest rates on government paper are often used as benchmarks for risk among market securities.
- The U.S. government’s paper is especially viewed as a kind of international standard for a risk-free rate of interest.
Understanding Government Paper
Because of their ability to tax or create new, legal tender money, government paper is generally viewed as carrying less risk than otherwise equivalent, privately-issued securities. As a result, the government’s debt obligations and the market interest rates thereof are often used as benchmarks for other market rates.
Risk perceptions of government paper issued by different nations vary widely depending on a number of factors including credit rating, default history, political stability, etc.
As a dominant world geopolitical and financial power and the issuer of the most popular world reserve currency, the U.S. government paper is considered to be among the safest investments and practically risk-free.
For cautious investors, it is good to know that U.S. government paper is considered to be practically risk-free and an extremely safe investment
Types of U.S. Government Paper
A Treasury bill (T-Bill) is a short-term debt obligation backed by the Treasury Dept. of the U.S. government with a maturity of less than one year, sold in denominations of $100 up to a maximum purchase of $5 million.
T-bills have various maturities and are issued at a discount from par. When an investor purchases a T-Bill, the U.S. government effectively writes investors an IOU; they do not receive regular interest payments as with a coupon bond, but a T-Bill does include interest, reflected in the amount it pays when it matures.
A Treasury bond (T-bond) is a marketable, fixed-interest U.S. government debt security with a maturity of 20 or 30 years. Treasury bonds make interest payments semi-annually, and the income received is only taxed at the federal level.
Treasury bonds are known in the market as primarily risk-free; they are issued by the U.S. government with very little risk of default.
A Treasury note is a marketable U.S. government debt security with a fixed interest rate and a maturity between 2 and 10 years. Treasury notes are available from the government with either a competitive or noncompetitive bid.
With a competitive bid, investors specify the yield they want, at the risk that their bid may not be approved; with a noncompetitive bid, investors accept whatever yield is determined at auction.
Government paper in the U.S. is considered the risk-free rate of interest. It is the safest investment in terms of return of principal, backed by the full faith and credit of the government. That's not to say these instruments can't lose value.
They will rise and fall with prevailing interest rates until they reach maturity. If you went to sell a bill, bond, or note before maturity, you might get more or less than its face value. If you hold them until maturity, you'll be repaid the face value, plus you'll either collect interest along the way, or at the end, depending on the instrument.