What is Government Bond

Bond is a financial instrument issued by a borrower. Therefore, bond involves a loan from lender/ investor to a borrower/issuer on agreed terms like fixed maturity date, periodic coupon payments. In public sector, Federal Governments are usually one of the main borrowers to support the gap between budgetary revenues and expenditures. The bonds issued by government are called government bonds or government securities and are considered risk-free bonds. These bonds are also considered benchmark bonds in financial market. In public sector such borrowers range from federal government, provincial governments, local governments or government enterprises. In private sector, main bond issuers/ borrowers are corporate entities.

As bonds pay periodic coupon payments during life of the bond, therefore bonds are also called Fixed Income bonds or securities. The term fixed income doesn’t mean that periodic coupon are made at fixed rate, rather it refers to fixed intervals of coupon payments over the life of bond. The corresponding coupon rate can be fixed rate or floating rate or combination of fixed and floating components.

Types of Government Bonds

Government of Pakistan (GOP) offers several types of securities that suit the needs of different investors. Broad types of securities are;

1. Zero-Coupon Bonds; these securities are issued at discount to face value and carry no coupon payments. The price difference between purchase price and maturity value serves as return to investors
2. Fixed Rate Coupon Bonds; these securities carry a fixed coupon rate paid after equal intervals over the life of bond. Such bonds can be issued at par, premium or discount to maturity value of bond. The coupon payment frequency are generally semi-annual or quarterly payments.
3. Floating Rate Coupon Bonds; these securities carry a floating coupon rate paid after equal intervals over the life of bond. Unlike fixed rate bonds, for floating rate bonds the coupon rate is re-set periodically (e.g. fortnightly, quarterly, Semi-annually) based on the Market Treasury Bill weighted average rate prevailing in the market. Such bonds can be issued at par, premium or discount to maturity value of bond. The coupon payment frequency are generally semi-annual or quarterly payments.