Government (State) Bonds - What are they? How do they work? advantages, disadvantages

State bonus

Financial assets issued by the State.

What are government bonds?

State bonds are financial assets issued by the State, which are issued in order to finance a specific investment by the public administration.

This type of bond is issued for subsequent receipt by certain individuals who decide to make the investment and in which the State assigns a valid period of time and interest to the bond, therefore, the individual who acquires said the bond will have to pay it and the State periodically grants you a percentage in interest and at the end of the term of the bond the entire bond is returned to you.

The State bonds are contracted by investors to assist a certain project of the public administration, due to this, everything related to this bond must be paid by the State and said financial obligation is part of the set of corresponding debts of the State, therefore, Therefore, it is attached to the public debt.

How do government bonds work?

State bonds are issued by the public administration, to finance the investment of a certain work and its way of working is as follows:

Once issued by the State, the bond will have a value, a certain percentage of interest, and an expiration date. Interested investors must acquire said bond by paying its value, and subsequently, its holder periodically receives the agreed percentage of interest. When the date of the bond expires, the State will return to the investor the full amount that he initially paid at the time of acquiring it.

Advantages and disadvantages of government bonds

The main advantages and disadvantages of government bonds are listed below:

Advantages

• Being a financial obligation that is contracted with the State, it is backed by the public administration.
• It is an investment whose interests are tax-free.
• The money invested will be used in public works, therefore, it is a social investment.
• It allows maintaining the purchasing power of money by receiving an economic return.
• They do not present risks in the percentage of profits, since the State establishes the percentage of interest from the beginning.

Disadvantages

• They are long-term investments.
• It does not have such a high percentage of interest.
• On some occasions, the interest granted by the bond is less than inflation.

Example of government bonds

Here are some examples of government bonds:

• The public administration issued 50 bonds to support a specific work, each bond was issued for a value of $15,000 for a term of 4 years with an annual coupon of 5% interest.
• The State issues 20 bonds to finance a given project, each bond has a value of $10,000 at 6 years with an annual coupon of 3% interest. The individuals interested in the investment make the purchase of the bonds, therefore, in this period of time the investors will earn 3% of their investment annually and at the end of said interval their $10,000 will be returned to them.
• The State issued 10 bonds to support public work, the value of each bond is $20,000 at 5 years with an annual coupon of 6% interest.

 

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