Evaluating Popular
Investments
Lesson 6
Investing in Government Bonds
Government Bonds
Aim:
 What are the advantages of buying
government bonds over corporate
bonds?
Do Now:
 Identify as many levels of government
as you aware of.
Government Bonds
 Do Now answer:
There is / are:
 One Federal government
 50 State governments
 Thousands (about 3,000) county
governments
 Even more local governments, such as
incorporated towns and water districts
Government Bonds
 First things first. Why do governments need to
raise money? Don’t they collect the money will
they spend by taxing us?
 Answer: Sometimes this happens, and our
leaders celebrate that their ability to
achieve a balanced budget. But usually,
they’ve made promises to spend more
money than the taxes they collect. The
difference is a deficit.
Government Bonds
 Aren’t deficits a bad idea?
 Answer: Sure. But sometimes economies
are struggling and economists believe that
raising taxes (which leaves citizens less to
spend) will only cause things to get worse.
 As well, there are political concerns.
Politicians want to be re-elected. Cutting
government spending or raising taxes
does not make a politician popular.
Government Bonds
 We know that corporations have the ability to
raise money two ways. What are they?
 Answer: Issue stock and issue bonds
 However, one of these options is not available to
governments. Which one, and why?
 Answer: Stock is not available! It represents
ownership. No one can own the government!
Government Bonds
 So, bonds it is! The department of the Federal
Government that issues them is the Treasury
Department. Therefore, the bonds are known as
Treasuries.
 Treasury bonds are backed by the “full faith and
credit” of the mighty U.S. Government. Thus,
are thought to be free from default risk!
Government Bonds
Treasury
Bills
 Maturities: 4, 13, 26 and 52 weeks
 Face value: $1,000
 Purchased at a discount and the full
amount is repaid at maturity
Treasury
Notes
 Maturities: over 1, up to 10 years
 Issued in denominations of $1,000 to $5,000
 Coupons paid semi-annually
Treasury
Bonds
 Maturities: over 10, to 30 years
 Denominations: $1,000 to $1 million
 Coupons paid semi-annually
Gov’t Agency Bonds
 Organizations that are wholly owned and
supported by the government
 Issue bonds that have a direct government
guarantee
 Housing agencies are the most active issuers of
bonds, among all agencies
 Example: Government National Mortgage
Association (GNMA), known as
Ginnie Mae, is a U.S. housing agency.
Gov’t Sponsored Enterprises (GSE’s)
 Organizations that have an implied gov’t guarantee
but are not directly owned by the government
 Example: Federal Home Loan Mortgage
Corporation (FHLMC), known as Freddie Mac and
Federal National Mortgage Association (FNMA)
commonly known as Fannie Mae
 GSE implies that the enterprise’s bonds are less risky than
other bonds because the government would not allow
them to fail because of their “implied” guarantee
Municipal Bonds
State and local governments are known as municipal
governments, or simply municipalities. Money from the
bonds they issue are used to build and expand:
 Public transportation
 Schools
 Airports
 Government buildings
 Highways
 Water, power, and
sewage systems
 Prisons and hospitals
 Colleges
 Roads
 Bridges
Why Buy Muni Bonds?
Tax Free Income
 Interest payments obtained from Municipal Bonds are
exempt from federal income tax and from state income
tax if you reside in the state that issued them
Safe Investment
 While United States Treasuries are the safest
municipals are considered second safest
Types of Muni Bonds
Mu Types of Bonds
Municipalities – Two
General Obligation Bonds
(GO)

Issued to raise funds for projects that
do not provide direct sources of
revenue




Revenue Bonds


Examples: Schools and roads
Issued in order to fund projects that
will serve the entire community, not
only those who pay for the services
Backed by the full faith and credit of
the issuing municipality
Interest and principal are paid with
regular taxes paid by citizens
Finance income-producing projects


Examples: Bridges (that have tolls)
Airports (that have “airport fees”),
Power and Water municipalities
Income generated by these projects
pays the bondholders their interest and
principal revenue
Projects that are backed by revenue
bonds provide services to only those in
the community who pay for their
services
Lesson Summary 1 of 2
1. Why do governments experience deficits?
2. As between stocks and bonds, which can’t
governments issue, and why?
3. What do we call bonds issued by the
Federal Government?
4. What are state and local governments
collectively known as?
5. What benefit do municipal bonds have that
are Treasuries and corporate bond don’t?
Lesson Summary 2 of 2
6. Which type of municipal bond’s interest
and principal (at maturity) are paid from
taxes already being collected from
citizens?
7. What are the advantages of buying
government bonds over corporate bonds?
Web Challenge #1
Q: Do municipal bonds have credit ratings?
• A: Yes. Not all state and local
governments are run as efficiently and
effectively as others. Therefore, they
don’t all have the same risk. They
deserve their own ratings.
•
Challenge: Research three municipalities
that have the highest ratings. What is it
about these states and local governments
that makes them so creditworthy?
Web Challenge #2
Challenge: Treasuries are remarkable in that
they have maturities (terms) as short as four
weeks to as long as 30 years!
Research the range of maturities available for
municipal bonds. Do they differ from
municipality to municipality or are they pretty
much the same? How do they differ from
maturities available on Treasuries?
Web Challenge #3
Challenge: Governments have found it so easy
to borrow money that they often keep
borrowing to cover deficits instead of doing the
hard work of balancing their budgets. This can
leave them with rather large amounts of debt.
Research and document the debt of the U.S.
Government. Research the debt of the states.
Write down any that don’t have debts.
Document the five most indebted states.
Hint: Visit usdebtclock.org.