An introduction to goverment bonds


Government bonds are short, medium or long-term bonds, issued by public authorities and
other government entities. As with any other bonds, default risk also exists with the government
bond. The bonds are principally an obligation or a debt instrument generally issued in a local or
foreign currency.

In the case of an issue involving a convertible currency of the concerned country or another, it is
generally known as a sovereign issue. The bonds provide a continuous curve from which they
can be risky but offer most valued financial assets (fixed rate bonds of other issuers, equities,
interest rate swaps, etc).

T-Bills or Treasury Bills are short-term U.S. government bonds with a maturity of one month to
one year. The T-Bills are among the most important instruments in the money market due to
their high liquidity.

The calculation of interest on T-bills adheres to the day count convention which is always
assumed on the basis of 360 days per year and not 365. T-bills are zero coupon bonds that are
issued by auction in which the discount is determined accordingly.

Negotiable government debt of the United States was the first to reach a sufficient volume that
grows around modern market interest rates. The U.S. Treasury is the author of many important
innovations in this regard ahead of many countries in the world. For example, the systematic
issue by tender, use of primary dealers, issuance of bonds up to 30 years, regular issuance of
securities in the medium term, breakup of bonds and bonds indexed to inflation.

American government bonds with a maturity between ten and thirty years are called T-Bonds.
Risk associated with these bonds is estimated through rating agencies such as Moody's. All
government bonds of Austria, Finland, France, Germany, Ireland, the Netherlands and Spain,
enjoy (as of December 2005), the highest credit rating awarded, after Moody's Aaa.

Aa1 Belgium, Italy and Portugal with Aa2, and Greece with Baa3 (as of 2010) below the rating
level. Depending on the creditworthiness of a state and its rating, the concerned State may be
required to pay a risk premium on its government bonds.

The Japanese Treasury is a key borrower in the world, with a negotiable debt which exceeded
the equivalent of 5,500 billion dollars in 2005. The Japanese government's total debt amounted
to 164% of GDP, a figure unique in the OECD.

The Japanese government bonds are called JGB, and they are essentially active on a domestic
level, with only 4% of the outstanding JGBs being held by non-residents. The preponderance of
Japan Post, very low rates and modest development, are all obstacles to the internationalization
of this market.