Pros & Cons of Government Bonds

There are many ways to invest your money and receive a return on your investment. Banks offer savings accounts that pay interest, which are safe but offer minimal returns. Stocks are more volatile and may have too much risk for casual or conservative investors. Bonds may, for some investors, offer safety with better returns than banks.

Safety

Government bonds are considered a nearly risk-free investment. Because government bonds are, in essence, a loan to the government, there is virtually no risk of losing your capital investment.

Returns

Returns on government bonds are not high. They are below returns on corporate stocks and bonds, but are usually higher than the return your cash would receive in a checking, savings or money market account. On average, over time, returns on 10-year bonds have run between 4 percent and 8 percent, with highs around 14 percent and as lows around 2 percent.

Predictability

Bonds provide very predicable returns. This is because they are sold with predetermined interest rates to be paid to the investor. Investing in bonds locks in an interest rate that will not change over the life of the security.

Tax Benefits

Bonds and their profits are often tax free. This is especially true for municipal bonds issued by a city for special projects. When calculating the total return of a bond investment versus a stock investment, always look at the tax benefits of the particular bonds you are considering.

Commissions

Many bonds can be bought directly from the issuing authority. Issuing authorities can be the U.S. Treasury, which issues Treasury Bonds, sometimes called T-bills. Cities and states also issue bonds for special projects, and those can often be bought directly from the issuing agency to avoid paying commissions and other trading fees.

Affordability

Many bonds are available in smaller denominations, often as low as $50 to allow casual investors access to government investment securities. Because bonds purchased directly from the issuing agency don't have a commission charge, bonds are a good way for people to save money and have a higher return than a bank deposit.

References

• 10-Year Treasury Note Index Chart
• The Advantage of Bonds
• Treasuries: Pros and Cons

Resources

• Where to Park Your Cash