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Invest in Bonds

By | Oliver Reed

Have you ever had to borrow money? If you have not seen yourself in the situation, surely you know someone who has. Loans are one of the most common parts of society and it is a situation that some other companies have also had to go through. Even the government does itDo you know how? Issuing government bonds. In this article, we tell you everything you need to know about investing in government bonds, in case you have considered doing so or in case you would like to try it in the future.

When the government issues a bond, it requests a certain investment of money. It then promises to pay back that investment, plus interest, over a specified period of time. Here, we’ll dive into the world of bond investing so you can determine if they should have a place in your investment portfolio. Although as many experts advise,  diversifying the investment is the best option for the saver, which is why many complement their investment in government bonds with the provision of bank deposits.

What are government bonds?

When the Government decides to issue government bonds, it does so to finance the public deficit. These bonds are titles issued by the Government in the long term for this purpose. When you buy a bond,  you are lending a sum of money to the government for a predetermined period of time. In exchange, the government agrees to make regular interest payments at a predetermined rate until the bond matures, and then to repay its principal at maturity.

For example, suppose you decide to buy a government bond of 10,000 euros for 10 years with an interest of 3%. The Government, in exchange, will agree to pay you interest on those 10,000 euros every six months, and then return the 10,000 euros when the 10 years have passed.

There are exceptions, of course, such as zero-coupon bonds. No interest is paid on those, but they sell for below face value. However, most government bonds follow the same formula: you invest a sum of money, charge interest, and get your money back at maturity. Where Is The Serial Number On A Savings Bond?

Government Bonds or Treasury Bills?

Some confuse government bonds with Treasury bills. The difference between one and the other is mainly the issue date of each of them. So the fact of investing in one or the other will depend mainly on the term you want to give yourself to recover the investment made.

  • Treasury Bills: Mainly for issues of less than 18 months. To do this, what is done is to use the discount formula by which what is done is to buy the Treasury bill, minus the applicable interest rate, so that at the expiration of this the full amount of the investment is returned.
  • Government Bonds: On the opposite side are government bonds. Its issuance period is greater than 18 months. When you are going to buy, what is done is that you pay the amount or a part of it and you receive receipts periodically, which can be quarterly, semi-annually, or annually. So when the term expires, the nominal is returned, plus the last corresponding coupon.

Before deciding whether to invest in treasury bills or state bonds, it must be taken into account that the preferred investment product for Spaniards, given the security it provides, is bank deposits. In fact, investing, for example, in treasury bills tends to be more profitable when public coffers are experiencing financial difficulties, so crisis periods are the most advantageous for this type of investment, while deposits, as can be seen in Raisin, ensure constant profitability.

Benefits of investing in government bonds

safe investment

An advantage of putting government bonds in your portfolio is that they are a relatively safe investment, although not so much when compared to putting money in bank deposits. Bond values ​​don’t tend to fluctuate as much as stock prices, so you’re less likely to worry about their potential fluctuations in value. Although if what you are really looking for is security, the most appropriate option is to bet on savings accounts or long-term bank deposits.

predictable revenue stream

Another benefit of bonds is that they offer a predictable income stream. Because bonds pay a fixed amount of interest twice a year, you can generally trust that money will come in as expected. Government bonds and Treasury bills offer the added benefit of paying tax-free interest to vary degrees.

An investment in society

On top of that, some investors like municipal bonds because they offer the opportunity to invest in society. When you invest in a government bond, you can help improve a local school system, build a hospital, or develop a public garden. It’s that social angle, combined with the potential for completely tax-free interest income, that causes some investors to forego the higher interest rates of other corporate bonds and invest in government bonds.

 

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