Loading the player...

What is a 'Government Security'

A government security is a bond issued by a government authority with a promise of repayment upon maturity. Government securities such as savings bonds, treasury bills and notes also promise periodic coupon or interest payments. These securities are considered low-risk, since they are backed by the taxing power of the government.

BREAKING DOWN 'Government Security'

The Treasury Department issues government securities through auctions to institutional investors for buying and selling. Retail investors buy government securities directly from the Treasury Department’s website, banks or brokers. Since most government securities are backed by the full faith and credit of the U.S. government, default is unlikely.

Rates on government bonds affect the entire U.S. economy. The government’s sale or repurchase of its bonds affect the money supply and influence interest rates. For example, when the Federal Reserve repurchases Treasuries, sellers deposit proceeds in banks, which lend money to customers, who deposit the loan proceeds in bank accounts, and use the money for various purposes. Therefore, every dollar of repurchased Treasuries increases the money supply by several dollars.

Examples of Government Securities

Savings bonds offer a fixed interest rate over a certain period of time. When an investor buys and holds a savings bond until maturity, he receives the bond’s face value plus accrued interest. Savings bonds are not redeemable for the first 12 months that they are outstanding. Redeeming a bond in the first five years means forfeiting the last three months of interest.

Treasury notes (T-notes) are intermediate-term bonds maturing in two, three, five or 10 years. They provide semiannual interest payments at fixed coupon rates. T-Notes typically have a $1,000 face value; those with two- or three-year maturities have a $5,000 face value.

Treasury bonds (T-Bonds) are long-term bonds maturing in 10 to 30 years. T-Bonds provide semiannual interest payments and have $1,000 face values. The bonds fund shortfalls in the federal budget, regulate the nation’s money supply, and execute U.S. monetary policy.

Pros and Cons of Government Securities

Government securities are exempt from state and local taxes, making government bonds advantageous for investors in high tax brackets. The bonds are very liquid, but have low rates of return. The securities rarely protect against inflation and have little or no capital gains opportunity.

Many investors hold government securities through mutual funds. The funds offer diversification among all types and maturities of bonds, which is difficult for retail investors to achieve without investing more cash than mutual funds require. However, fund-management fees lower investors’ overall returns.

Although government securities carry little risk of default, they carry interest rate risk. When interest rates rise or fall, bond prices react inversely. Fortunately, when interest rates rise, T-Note prices typically fall less than with other bonds. With their steady income streams, government securities are a conservative choice in a fluctuating market.

  1. Government Bond

    A government bond is a debt security issued by a government to ...
  2. Treasury Bond - T-Bond

    A treasury bond is a marketable, fixed-interest U.S. government ...
  3. U.S. Savings Bonds

    A U.S. savings bond is a government bond that offers a fixed ...
  4. Bond

    A bond is a fixed income investment in which an investor loans ...
  5. Government Paper

    Government Paper are debt securities that are issued or guaranteed ...
  6. Federally Guaranteed Obligations

    Federally guaranteed obligations are debt securities issued by ...
Related Articles
  1. Investing

    Explaining Government Bonds

    A government bond is a debt security a government issues.
  2. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
  3. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  4. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  5. Investing

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  6. Investing

    The Basics Of Investing In Foreign Government Bonds

    Individuals contemplating the purchase of government bonds need to understand the risks of bond investing.
  7. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  8. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center