Government Bond Money

The U.S. government spends an enormous amount of money each year. Federal taxes are used to pay for many expenditures. The government has many ways to raise income such as raising taxes or borrowing money. However, taxes cannot pay for everything and higher taxes are always unpopular. This leaves the government in the position of incurring more debt. One such way to raise money is through government bonds. Government bond money is in all practical sense loans issued by the government to raise money for a variety of federal expenditures that are not covered by tax revenues. Government bond money offers several advantages to investors. Government bond money offers a safe investment for the loan's principle because it is backed by the U.S. government. Government bond money also provides a steady source of additional income and compared to other types of investments, is relatively low risk.

Government bond money is known also known as 'fixed-income' securities because the income from the bond is at a fixed yearly rate. Even if the bond is sold on the secondary market to another investor, it will still generate the exact same amount of income. This is different from the fluctuating prices in the stock market where stocks might earn other investors more money depending on the current state of the market.

The Federal government also allows state and local entities to issue government bonds that are exempt from federal income taxes. Furthermore, state and local governments can also waive state and local income taxes. This means that borrowers in higher tax brackets can have a higher after-tax yield than other types of investments.

There are some drawbacks to government bond money. Having a government bond, which is an asset easily liquidated, can reduce a student's chances of qualifying for Federal aid for college. Another drawback is if the bond is redeemed before it reaches its maturity, there is a penalty to pay. The penalty if often the loss of several months worth of interest that could have been earned, thus lowering the bond's value. Government bond money is low risk but also has a low return due to low interest rates.