How Is The Discounted Government Bond Market Beneficial?
A government is an agency or organization of individuals governing a society, usually a country. Governments are found in different forms and names, depending on the political systems of the countries they administer. It is also known as a form of government or administration. There are numerous types of government.
The first type of government found in the world is democracy. It is ruled by the people through their elected representatives. Some countries are democratic in nature while others are not. democracy is the rule of many political parties that compete for office through election, with the ruling party assuming the role of defender of the people from any attack by other political parties.
In a republic, a government may exist without absolute power. In these systems power can be shared among several groups, with each having a certain amount of power based on their size of the population. The supreme power, known as the monarch, acts as a representative of all citizens. Major cities such as Rio are governed through a mayor, who is elected for a fixed term.
A major form of government securities are government bonds. These are backed by governments in various ways. Bonds offered by the United States Federal Government are popular. These offer interest rates that are relatively low due to the very low default risk of the issuer.
Government debt is popular in other countries. These include government securities issued by the European Union and the United States. They offer attractive interest rates due to the money supply elasticity. Money supply is the amount of currency in circulation. With the change in the money supply, interest rates and inflation are affected, thus affecting bond prices.
The issue of government securities arises when a certain amount of bond holders will require to redeem the principal on their debt. Most commonly, this happens when the economy faces trouble. A large number of bonds will be included in a government plan designed to keep money circulating. The United States Federal Reserve System distributes most of its money through the twelve regional banks.
Many governments also issue debt through auctions. The proceeds from such auctions are used to finance projects and programs. In this case, the amount of debt is limited to the value of the bonds being auctioned. Other than government securities, other financial instruments are used as collateral. For example, some banks give mortgages to people who can pay them down.
Many people view government securities as risk-free securities because they carry zero risk. Since these securities are backed by the government, there is some assurance that the issuer will be able to redeem them. This does not make them inherently safe, but since they carry a lower rate of interest, it may be more affordable for the debtor than higher interest rates on credit cards and personal loans.
Since the government bonds issued by the Federal Reserve carry a relatively lower rate of interest, they carry less risk. They also do not fluctuate based on the money supply, unlike financial institutions, like banks. When the bank rates rise, government bonds are likely to follow and their prices will also increase. When the money supply falls, however, bonds are more likely to fall in price and they are more closely tied to the money supply. Therefore, the purchase of government bonds is more likely to provide economic benefit when interest rates are falling rather than increasing.