The Advantages of Government Bonds

When governments need to raise money for projects, they can't always increase taxes. Instead, they often issue bonds that you can buy. You then receive principal and interest payments for a certain number of years before the bond matures. Depending on your investment goals, government bonds could provide a number of advantages that other investments don't.

Tax Benefits

Both state and federal bonds offer potential tax savings. The interest on federal bonds is exempt from state and local taxes. Municipal bonds, on the other hand, usually aren't subject to federal taxes and, in some cases, they are also exempt from state and local income taxes, too. However, some municipal bonds may be taxed if you're hit with the alternative minimum tax, so check if your municipal bond would be affected before you buy.

Security

Federal bonds are backed by the U.S. government, which is arguably one of the safest investments out there. So, barring the U.S. defaulting on its debts, your investment is safe. According to Edward Jones, many municipal bonds are insured so that even if the municipality defaults, your principal and interest payments are safe. Other investments, such as stocks or corporate bonds, don't have the same level of security. If the company goes bankrupt, you could lose your entire investment.

Liquidity

Government bonds can be bought and sold just like other investments, such as stocks and corporate bonds. For example, if the bond won't mature for another five years but you need cash now, you can sell the bond to another investor and get your money out. However, because of changing market conditions, you could find yourself taking a loss to unload the bond. On the other hand, depending on the circumstances, you might also be able to make a gain.

Fixed Rates

Having a fixed rate on your government bond allows you to budget for how much income you'll have to spend as you receive payments. Plus, if interest rates fall, your rate is locked in so you earn a higher rate than the market is paying. Of course, there's always the chance that interest rates could go up. In that case, having a fixed rate hurts you because you're stuck with the lower rate.

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