Long term Government Bonds And Risk Factor To Porfolio
| Bonds or securities that are issued by a national government are known as government bonds. These bonds are issued through agencies that are part of the government’s treasury department and denominated in the country’s own currency. |
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Investors consider government bonds to be risk-free. Any debt obligation is considered to be risk-free only when the investors can claim complete trust in the investment portfolio. Investors should have the belief that their principal and interest will be paid back promptly at the end of maturity. In this regard, government bonds are trustworthy as these securities carry the guarantee issued by the government.
Like an individual’s credit history is assessed on the basis of his/her borrowing and repayment history, a country’s financial situation is scrutinized based on its financial history. Depending on this, the credit rating of a country is determined. A country should have a good credit rating so as to borrow funds from other countries and investors. Some of the criteria that are usually assessed by financial institutions while providing loans to other countries include the government’s lending and repayment history, the level of outstanding debt and the strength of its economy.
In case of long-term government bonds, the risk of default is a little bit more when compared to short-term government bonds. Defaulting in long-term government bonds usually occurs in case of situations like economy downturn or during the time of war. Governments tend to avoid any such defaults by increasing taxes or simply printing more money for the purpose of paying the bond at maturity.
However, there are certain other risks that are not explained in case of long-term government bonds. These include currency risk for foreign investors and inflation risk.
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Long term Government Bonds And Risk Factor To Porfolio