Examples of Government Bond in the following topics:
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- We start the analysis with the same liquidity in both the government bond and corporate bond markets in Figure 2.
- Then the secondary markets expand for government bonds boosting the liquidity for these securities.
- Consequently, the investors are attracted to the government bonds because they are more liquid.
- Demand function increases and shifts rightward for government bonds.
- Thus, the government bond prices rise, which reduces the interest rate for government bonds.
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- A government bond is a bond issued by a national government denominated in the country's domestic currency.
- A government bond is a bond issued by a national government, generally promising to pay a certain amount (the face value) on a certain date as well as periodic interest payments.
- Government bonds are sometimes regarded as risk-free bonds because national governments can raise taxes or reduce spending up to a certain point.
- Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
- Government bonds are usually referred to as risk-free bonds because the government can raise taxes or create additional currency in order to redeem the bond at maturity.
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- For example, the U.S. government bonds have a lower risk of default and higher liquidity than municipal bonds, whereas municipal bonds are the state and local government bonds.
- However, the interest rates of municipal bonds are consistently lower than U.S. government bonds for the last 50 years because investors do not pay U.S. taxes on the interest they earn on municipal bonds while they pay U.S. government taxes on U.S. government securities.
- If you bought municipal bonds, subsequently, you would earn a lower interest than U.S. government securities.
- Government has exempted municipal bonds from federal taxes.
- Therefore, municipal bonds have a lower interest rate than U.S. government bonds.
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- We draw the supply and demand for two markets: government bond market and corporate bond market.
- Some investors demand fewer corporate bonds and invest more in government bonds.
- Thus, the demand for corporate bonds falls while the demand for government bonds rise because the investors consider the government bonds default-free.
- Did you notice the government bonds have a higher bond price while corporate bonds have a lower bond price?
- Taking the difference between the government bond and corporate bond interest rates, we can calculate the risk premium.
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- A bond is an instrument of indebtedness of the bond issuer to the holders.
- The main categories of bonds are corporate bonds, municipal bonds, and U.S.
- Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
- Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
- A bond is a financial security that represents a promise by a company or government to repay a certain amount, with interest, to the bondholder.
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- Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. government.
- First the liquidator is paid, then government taxes, etc.
- Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies because it may appear to be more stable and predictable than their domestic currency.
- Bulldog bond - a pound-sterling-denominated bond issued in England by a foreign institution or government.
- Bond of National Loan issued by Polish National Government in 1863.
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- A term bond matures on the same date as all other bonds in a given bond issue.
- Serial bonds in a given bond issue have maturities spread over several dates.
- Territory, city, local government, or their agencies.
- Also called a government bond, this is issued by the Federal government and is not exposed to default risk.
- Backed by the "full faith and credit" of the federal government, this type of bond is often referred to as risk-free.
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- Four factors are expected profits, business taxes, expected inflation, and government borrowing.
- Quantity is determinate while bond prices, and thus bond interest rates are indeterminate.
- If investors, businesses, and government expect higher inflation, then the supply for bonds increases while investors purchase fewer bonds because inflation erodes the value of their investments.
- Businesses and government supply more bonds because they can repay the bonds with cheaper dollars.
- Thus, businesses and the government would borrow the cheaper funds from foreign investors.
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- Information costs influence the bond prices and interest rates.
- For example, investors know both U.S. government securities and corporate bonds from large corporations well, and the securities have the lowest information costs.
- We depict the bond markets in Figure 3.
- High information cost bonds are not as attractive as an investment, so investors buy fewer bonds, reducing bond prices and raising interest rates.
- Therefore, low-information-cost bonds pay a lower interest rate.
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- Most individuals purchase bonds via a broker or through bond funds.
- Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds.
- Additionally, bonds can be purchased directly from the U.S. federal government without the use of a broker and without paying broker commission fees.
- An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
- Most bond funds pay out dividends more frequently than individual bonds.