What is Government Securities ?
Definition of Government Securities
Government security is like a simple bond which is issued by Government itself. Just like any other business which needs money to run its operations and hence borrow money from investors, Government also needs money to operate and so they borrow money from financial institutions or public. Government produce securities in the form of bonds, notes and other debt instruments.
Brief Explanation of Government Securities
Advantages of Government Securities:
- As they are issued by the Government so the risk of default is relatively low.
- They are easily liquid as they can be sold easily in market. That means if you want cash and want to sell your bond then there is active open market for your bond.
- It is better than equity investment as bond holders receive fixed interests and principal amount upon maturity.
- The bonds issued from a state is normally exempted from tax.
- These are fixed rate bonds means the interest rates are locked. If the market interest rate falls then you receive more than market.
- They can be a good and safe diversifier in your investment portfolio.
Dis Advantages of Government Securities:
- Higher the risk, higher the return. As Government bonds are low risk bonds hence their profit yield can be low too. Corporate bonds as compared to Government bonds yield more interest as they are riskier in nature and hence high return.
- One of their advantage is also their disadvantage. These are fixed rate bonds and if the interest rate goes high these bond holders would receive less than the market interest rate.
- These bonds can lose market attractiveness if the inflation and return interest rate increases in the market.
- If kept for a longer period of time where inflation is high, an investor would end up in receiving low income than the original or principal amount he spent on that security.