As I am going to teach you in bonds 101, what are Government Bonds in Kenya and how they work, a bond is a type of loan.
An investor usually, in this case, takes their money and lends it to the issuer of the bonds in exchange for interest income at a pre-determined rate.
The bond, however, has an expiration date which is also the maturity date, at which the stated par value of the bond must be returned.
Also, read about bid bonds and how they work.
Government bonds are debts which are security issued by a government to bridge its fiscal deficit.
This kinds of bonds can pay periodic interest payments called coupon payments.
These bonds are low-risk investments because the government issues them.
Bonds that mature in less than one year are known as Treasury bills while those that take more than ten years to develop are identified as treasury bonds.
How do the Government Bonds work?
You lend the government an agreed amount of money when you buy a government bond.
In return, what you get back from the government is a set level of interest at regular periods known as the coupon.
This is making government bonds a fixed- income interest.
When the bond expires, you usually get back your original investment; this is known as the maturity date.
The date of maturity is when the company must pay back the principal—initial investment—to bondholders.
Different kind of bonds come with varying types of maturity dates. This could vary from a year to thirty years or more.
Before investing in this kind of bonds, there are several vital things that you need to understand.
Unlike stocks, bonds do not offer ownership participation in a company through a return of profits or voting rights.
Also, read about the M-Akiba Bond.
Bonds represent the issuer’s loan obligations and the likelihood of repayment, and other factors influence their pricing.
Advantages of Government Bonds
- Government bonds have steady interest income while others sell at a discounted price to their face value.
- Bonds are said to be a low-risk investment. They are also considered a safe-heaven for investment.
- Some of the bonds are exempt from state and local taxes.
- The bonds can easily be bought and sold in the market and are available through mutual funds and exchange-traded funds.
- Investors receive regular interest payments and a return of their invested principal on maturity.
Also, read about Performance Bonds in Kenya: The Ultimate Guide
Disadvantages of Bonds
- Government bonds offer low rates of return relative to equities and corporate bonds.
- Only some government bonds keep up with inflation, or the pace of prices increases in the economy.
- Government bonds carry a high risk when interest rates are rising if investors are holding lower-paying fixed-rate bonds.
- These bonds carry risks such as country risk and political risk, particularly those in emerging markets.
Government Bonds Conclusion
A bondholder can sell the bond to other investors after they have been issued. In other words, an investor does not have to hold a bond to maturity.
Bonds can also be repurchased by the borrower if interest rates decline, or if the borrower’s credit has improved, and it can reissue new bonds at a lower cost.
Must Read: Investing in Kenya