Types of Bonds

A government bond is issued by a national government, generally promising to pay a certain amount (the face value) on a certain date, as well as periodic interest payments. Such bonds are often denominated in the country's domestic currency. Government bonds are sometimes considered risk-free because national governments can raise taxes or reduce spending up to a certain point.

They often "print more money" to redeem the bond at maturity. Most developed country governments are prohibited by law from printing money directly, and that function has been relegated to their central banks. However, central banks may buy government bonds to finance government spending, thereby monetizing the debt.

Government Bond The short-term bond of the Kolchak government in 1919 had a face value of 500 rubles.

Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds. For example, in the 2010 Greek debt crisis, Greece held the debt in Euros. One proposed solution was for Greece to return to issuing its own Drachma.

In the primary market, government bonds are often issued via auctions at stock exchanges. There are several different methods of issuing, such as auctions, including guarantee, combined auction and guarantee, and others. There are two types of interest rates: fixed and floating. In the secondary market, government bonds are traded on stock exchanges. Unlike the equity system, the bond secondary market uses a completely different system with different trading methods. At the secondary market, each bond will be assigned its very own bond code (ISIN code).

Government bonds are usually referred to as risk-free bonds because the government can raise taxes or create additional currency to redeem the bond at maturity. Some counter-examples do exist where a government defaulted on its domestic currency debt, such as Russia in 1998 (the "ruble crisis"), although this is very rare (see national bankruptcy). Another example is Greece in 2011. Its bonds were considered very risky, partly because Greece did not have its own currency.

Currency risk exists for government bondholders. For example, in the U.S., Treasury securities are denominated in U.S. dollars. In this instance, the term "risk-free" means free of credit risk. However, other risks still exist, such as currency risk for foreign investors (for example, non-U.S. investors of U.S. Treasury securities would have received lower returns in 2004 because the value of the U.S. dollar declined against most other currencies).

Secondly, there is inflation risk, in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation rate is higher than expected. Many governments issue inflation-indexed bonds, which protect investors against inflation risk by increasing the interest rate given to the investor as the economy's inflation rate increases.

Source: Boundless Finance, https://ftp.worldpossible.org/endless/eos-rachel/RACHEL/RACHEL/modules/en-boundless-static/www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/types-of-bonds-66/index.html
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