Tutorial: Government Bonds


What are government bonds?

Government bonds are medium- to long-term debentures issued by countries, respectively the public sector. The Federation, the provinces, and the municipalities in Austria use government bonds to finance long-term state infrastructure projects such as road and rail construction, education, and the healthcare system. Austrian government bonds are gilt-edged securities. International and CEE government bonds are mainly focusing on financing infrastructure and other development projects for the community (e.g. roads, harbours or power stations). Depending on the rating of the respective country, these bonds are considered a safe investment, because the redemption is guaranteed by a steady flow of tax income.

How do government bonds work?

Government bonds can have floating or fixed-rate interest payment and work like other bonds (see tutorial for bonds for more information).

An important criterion of evaluation for a government bond is the rating. The lower the rating, the riskier the investment – and the higher the interest rate. For international government bonds in foreign currency the exchange rate risk also has to be considered.

Your benefits

Government bonds are an interesting long-term investment opportunity. Depending on the rating of the country they are suitable for conservative investors who look for safe forms of investments.

Your advantages

  • Austrian government bonds are gilt-edged securities, which means that investors enjoy a very high degree of safety.
  • Investors in international government bonds may benefit from foreign currency appreciation.
  • Investors benefit from interesting coupon payments throughout the entire term of the bond.

Risks you should be aware of

  • Change of market interest rates and credit rating of the issuer may lead to price fluctuations and capital loss in case of sale before maturity date.
  • The redemption at 100% of nominal amount by the issuer only applies at maturity.
  • The currency risk may lead to capital loss for interest payments and redemption.
  • Price fluctuations of CEE government bonds may be higher than in Euro countries. A premature sale may lead to capital loss.

How do government bonds react to…

… rising interest rates?
Government bonds with fixed interest rate fall when interest rates are rising. Government bonds with floating interest rate, on the other hand, benefit from rising interest rates. Given that these bonds ("floaters") have their interest rate periodically adjusted to a referential rate such as the EURIBOR, an increase in the level of interest rates also means a rising interest rate for the bonds. The price of the bond tends to oscillate around face value.

… stable interest rates?
In the case of stable interest rates, neither the price nor the coupon of government bonds changes (if other criteria, e.g. the rating of the issuer, stays unchanged).

… falling interest rates?
Government bonds with fixed interest rate increase when interest rates are falling. Falling interest rates, on the other hand, have a negative impact on government bonds with floating interest rate. Given that these bonds ("floaters") have their interest rate periodically adjusted to a referential rate such as the EURIBOR, a decrease in the level of interest rates also means a falling interest rate for the bonds. The price of the bond tends to oscillate around face value.