A government security is a bond or other type of debt obligation issued by the government with the promise of repayment at the maturity date. Governments, like people and businesses, require funds to function, and they tend to borrow when necessary. They do so by issuing securities. Government securities are a type of investment that the government offers at a fixed rate of interest and low risk.
Types of government securities
Various types of securities include the following:
Treasury Bills - They are short term securities with a maturity period that ranges from a few days to weeks. Investors gain from them as they are sold at a discounted price whereas upon maturity, they are redeemed at the original price.
Treasury Notes - Their maturity period, longer than that of treasury bills, ranges between two to ten years in which interest is paid every six months.
Treasury Bonds - They are long term securities with a maturity period of about 30 years where interest is paid every six months.
TIPS (Treasury inflation protected securities) - The principal amount in these securities rises with inflation and falls with deflation and hence are protected against price volatility.
Saving Bonds - They are low risk investments and are protected against the changes in interest volatility.
Why are they issued?
Key reason for the issuance of most government securities is to raise revenue for government spending. Treasury securities are issued by the central government to address budget shortfalls.
State governments, on the other hand, frequently issue bonds to fund public infrastructure projects which include the building of schools, statues, museums, among others.
Another purpose of issuing securities is to keep the economy's money supply under control. The government sells government securities if it intends to curb the rate of money growth in the economy.
This means it cuts down on the excess flow of money in the economy by issuing government securities instead. This way, inflation can be kept under control by slowing the expansion of money in the economy.
How are they sold?
In India, government securities are sold by the Reserve Bank of India in the primary market consisting of commercial banks, state and central government, financial institutions and insurance companies through an auction which is open for bidding. The securities can then be traded in the secondary market, which is open to both individuals and businesses.
Can individuals buy securities?
Individuals cannot buy these securities in the primary market when the RBI opens them in the auction, but they can be bought by small investors in the secondary market at a set price based on the value of the securities. Until 2001, only banks, big financial institutions, and mutual funds were allowed to purchase government bonds, but now they are open to purchase by ordinary investors too.
They are considered a good investment option, because they generate income for a long duration of time. In comparison to other asset classes such as stock or mutual funds, the primary benefit of government securities is their safety as they are available at little or no risk and are backed by the government.