DEFINITION of Government Paper
Government Paper are debt securities that are issued or guaranteed by a sovereign government. Government paper of a nation is usually perceived as the least risky 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.
BREAKING DOWN Government Paper
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. U.S. government paper is considered to be among the safest investments and practically risk-free.
Types of Government Paper
Treasury Bills. 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 $1,000 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.
Treasury Bonds. A Treasury bond (T-bond) is a marketable, fixed-interest U.S. government debt security with a maturity of more than 10 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.
Treasury Notes. A treasury note is a marketable U.S. government debt security with a fixed interest rate and a maturity between one 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. It's 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 may 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.