Government BondsGovernment bonds are basically a loan the investor makes to a government entity like the US government or a municipality. In exchange for providing the loan, which is the principal you put down to buy the bond, the issuing agency agrees to pay you interest, either semi-annually or annually. Generally when people say "government bonds" they are referring to bonds issued by the Federal government. These are consider the safest of all investments since they are backed by the full faith and credit of the government of the United States. Other governments throughout the world, of course, issue bonds as a means of borrowing large sums of money. US government bonds can be broken down into Treasuries and Savings Bonds. Treasuries come in three distinct flavors, depending on the length of time you hold on to the bond, or the maturity. A Treasury Bill is a short-term security with a maturity of one year or less. These are zero-coupon bonds, meaning that they do not pay interest. Instead, you purchase the bond at a discount to face value. When you redeem the bond at maturity, you are paid back your principal plus the difference between that amount and the face value on the bond. That difference is your earnings. A Treasury Note offers an intermediate length investment of 2 to 10 years. Interest on Treasury Notes is paid every six months. Treasury Bonds are long term government bonds with maturities of between 10 to 30 years. Interest is paid on Treasury bonds every six months. Treasuries are exempt from state and local taxes, but earnings are subject to Federal income tax. Another option among US government bonds are Savings Bonds. These are available in two varieties. Series i bonds are indexed to inflation, while series EE bonds have a fixed interest rate. Savings bonds pay interest every six months. Series EE bonds can be held for up to 30 years. Like Treasuries, Savings Bonds are exempt from state and local taxes, but they have the additional advantage in that you can defer paying Federal income tax on the earnings until the bond is redeemed.
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