Types of Government Securities – In Detail
In the world of investing, government security applies to numerous investment products issued by a government body. According to The Reserve Bank of India, government securities as tradable instruments are issued by the State Government or the Central Government. These carry a minimal risk of default and are called risk-free gilt-edged instruments. Given below are some types of government securities offered by The Reserve Bank of India. Here:
- Treasury Bills: These are short-term government securities with maturities of up to 1 year. Currently, they are issued in three different types – the ninety-one day, eighty-two-day, the one hundred sixty-four day, and the three-hundred bills. Since, they don’t pay interest the profit of the investor is the difference between the discounted issue price and the face value. To issue the treasury bills, the RBI performs weekly auctions.
- Dated Government Securities: These are long-term government securities that have either floating or a fixed rate of interest. They are issued at face value; interest or coupon is fixed at the time of issuance and remain constant till redemption. Also, the tenor of the security is fixed. The investors in dated government securities are primary dealers such as insurance companies and commercial banks. Examples: zero coupon bonds, fixed and floating rate bonds, bonds with put or call options, capital indexed bonds.
- Cash Management Bills: These are short-term securities that are flexible as they can be issued when required. Their date of issue and tenure are based on the temporary cash needs of the government, but, the chosen tenure must be less than 91 days to be precise. They are given at discounts on the face value by RBI just like treasury bills.
- State Development Loans: Basically, these are dated securities that are issued by the State government for meeting their budget requirements. The issues are auction through the ‘Negotiated Dealing System’ once every two weeks. When we talk about their rates, they are slightly higher as compared to Dated Government Securities.
- Zero Coupon Bonds: These bonds are issued at discount to face value & redeemed at par. On January 19th, 1994 Zero Coupon Bonds were issued. The tenor is fixed for the security; the securities do not carry any interest rate or coupon. At last, the security is redeemed at face value on its maturity date.
- Capital Indexed Bonds: With these bonds the interest is fixed percentage over the wholesale price index, thus, providing investors with an effective hedge against inflation. On December 29, 1997 these bonds were floated on tap basis.
- Floating Rate Bonds: Bonds which don’t have a fixed coupon rate. On September 1995 Floating Rate Bonds were first issued. In most cases, floating rate bonds are issued by the government.
Features of Government Securities in India:
- The liquidity is excellent as an investor can easily sell securities in the secondary market.
- There is no TDS (Tax Deducted Source).
- The securities are issued at the face value and held in the Demat form.
- The maturity and interest rate are mentioned during the time of issue the securities.
- The maturity date of the securities ranges from 2-30 years.
- The securities can be redeemed at face value on the maturity date.
Government securities are the best investment option because they are safe and risk-free.
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