State bond

economic-dictionary

A State bond is a type of bond issued by a country and its government as a means of financing and that assumes for its holder the gain of fixed interest during the duration of the bond until its maturity, which is usually between three and five years.

The country or government that issues public debt with the State bond seeks to obtain funds from the markets, committing to their return together with previously established interests. Due to the nature of these financial assets, it is common that the interest to be collected annually is normally fixed and its amount and the collection date will be previously specified at the beginning.

This type of public financial assets have a substantially lower level of risk than others from the private sphere, so that simultaneously a government bond has lower profitability levels. On the other hand, this tool is the main instrument a country has to obtain income in the medium term in exchange for the corresponding annual coupons and their interests.

Maturity of government bonds

Generally, government bonds have a maturity term of around three to five years. Alternatively, it is generally considered that the obligations (similar products, although longer-lived) go beyond the decade and the treasury bills more in the short term (less than one year).

As in the case of current bonds, this type has a great exit in the market and, therefore, it is easy to be exchanged and convertible into money. In Spain, the auction of these bonds takes place on a monthly basis through the Bank of Spain and different financial intermediaries. For example, the existing government bond model in Spain has a periodic interest in the form of a coupon, a nominal value of 1,000 euros and a repayment term between three and five years.

A government bond has a nominal value (of 1000 euros and its multiples) that will be the value that the holder or investor will receive at the maturity of this asset. However, this price does not act as a limit on the sale of these assets and it is possible that these are exchanged under a different sale price, contrary to what happens with other types of bonds. Bonds of this type can be obtained both in the primary market directly from their issuance by the government and in the secondary market through other financial agents and at prices set by the market at that time.

As mentioned above, the returns that the investor receives annually as the owner of a State bond are called coupons, and each of these receptions of money is accompanied by the corresponding interest that has been generated in that period of time and that has been set. previously in the issuance contract.

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