- The U.S. Government backs all of its government bonds with its "full faith and credit." With this expression, the government promises investors that it will repay their money and that it will use any means necessary to make that payment. If the government runs out of money, it will either rely on its credit, print more money or generate tax revenue to make those payments. As a result, according to the U.S. Securities and Exchange Commission, government bonds are considered to be among the safest investments available.
- All government bonds pay some type of income, and this income is also backed by the government's full faith and credit. While Treasury notes and bonds pay interest twice per year, other government securities, including U.S. savings bonds and Treasury bills, only pay income at maturity. The amount of interest a bond will pay is set at issue and does not change over the lifetime of the bond. For example, if you buy a 10-year government bond that pays 5 percent interest, you will receive the same amount of interest at every payment date for the life of the bond.
- In addition to safety and income, government bonds carry another advantage in the form of a tax break. While most income investments, including corporate bonds, are fully taxable by both federal and state taxing authorities, government bonds are exempt from state tax. If you live in a high tax state, such as New York, this can be a substantial savings. Government bonds do represent taxable income at the federal level. For savings bonds, you do not have to pay tax until the bond matures.
- Some investors view buying bonds as an act of patriotism. When you buy a bond from the government, you are basically lending the government money for use in government operations. The money you use to purchase a bond goes directly to fund the borrowing needs of the country. Every bond you buy reduces the dependency of the government on foreign investors to provide capital to keep the country running.
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