What is a Government bond?

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Government bonds are not like shares. They are not traded on stock market. And these are sold through distributor, selected branches of banks and post offices. Government bonds offer guarantee source of income. They are safe bonds to invest because of consistency. But also see features of government securities in India. Thus you can check importance of govt securities.

Types of Government Bonds

Government bond is issue either by Central or State Governments with 10 year maturity. Interest is tax at federal level but not at state and local level. These Government securities carry no risk. But, they are called risk-free gilt-edged investment instruments. You can see importance of government securities in market. And also see Advantages of zero coupon bonds. Below see types of Government bonds.

  • Dated Securities
  • Zero Coupon Bonds
  • Floating rate Bonds
  • Call / Put Option Bonds
  • Dated Government Securities

Dated Government Bonds

These are long term securities with fix interest rate. They are issue at face value (amount pay to holder at maturity). But Coupon or interest rate is fix at time of issuance of security. Hence, it remains constant till its redemption. And tenure of security is fix at time of issuance.

Thus interest or coupon payment is done on half yearly basis over its face value. So, security can redeem at par (face value) at its maturity date. For example 6.85% GOI 2021 means it will mature in 2021 and interest rate is 6.68%. And see Risks and Benefits in Bonds

Zero coupon bonds

Zero Coupon Bonds are securities. That is issue by government at discount to Face Value. But, you can redeem at Par Value. In India government bonds use to issue zero coupon bonds in nineties. It has not issue such securities after that.

But, zero coupon bonds do not carry any coupon rate or interest rate. They are issue at discount on their face value and on its maturity date. And tenure of security bond is fix.  Thus you can see government securities example. For more details check Difference between corporate bond and government bond

For more details check Zero coupon bond yield and rates. Best time to buy zero coupon bonds is when interest rates are high.  And invest in Zero Coupon bond is long term investment as there maturity time is ten or more than ten years.

Floating Rate Bonds

These bonds do not have fix coupon rate. And coupon rate is re-set at pre-announced intervals. Such as every six months or one year. These bonds refer to change interest rate bonds. Thus interest rate or coupon rate is higher than Benchmark rate.

Thus it is link to that benchmark rate. So, benchmark rate increases then coupon rate also increases. Floating Rate Bonds were first issue in September 1995 in India. After that they have been issue many times.

Bonds with Call or Put Option

Call or Put Option bonds were issue in 2002 for first time. Bonds that are issue with features giving options. This means that issuer can have option to buy-back (call option). You can have option to see bond (put option) during currency of bond. This gives flexible.

These bonds option can be exercised after completion of five year tenure. From date of issuance of any coupon date.

Partly Paid Stock

Partly Paid Stock is security where principal amount is done in installments over given period of time. These stocks are meant to meet your needs with regular funds flow. When government do not need funds immediately.

These stocks are issue at face value. But, this amount is pay by buyer in installments over period. At time of issuance coupon or interest rate is fix. And then remain constant till redemption. So, tenure of security is fix. Interest or Coupon payment is made on half yearly on bond face value. Hence, you can redeem at par on maturity date.

Capital indexed Bonds

Capital indexed Bonds are securities. Where interest rate is fix percent on wholesale price index (WPI). These coupon rates provide you with an effective hedge against inflation. Capital indexed bond is common form of inflation linked bond

Finally, check how to buy government bonds online. But you can also see tax free bonds in India. You must check list of government bonds in India. And for more details see government bonds interest rate. For better understand check when to buy bonds and when to sell. Thus, see government bonds UK rates.

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