Legal Definitions - government security

A government security is a type of debt instrument issued by a national, state, or local government to raise money. When an individual or institution purchases a government security, they are essentially lending money to that government. In exchange, the government promises to pay back the principal amount (the original loan) at a specified future date, often along with regular interest payments over the life of the security. These instruments are generally considered low-risk investments because they are backed by the "full faith and credit" of the issuing government, meaning its ability to tax and generate revenue.

• Example 1: Federal Treasury Bonds

  A large university endowment fund, seeking a secure place to invest its donated funds, decides to purchase a substantial amount of U.S. Treasury bonds. These bonds are a prime example of a government security because they are debt instruments issued by the U.S. federal government to finance its operations, such as national defense or social programs. By buying these bonds, the endowment fund lends money to the government, which in turn promises to pay interest periodically and repay the principal amount when the bonds mature.

• Example 2: Municipal Bonds for Local Projects

  A county government needs to fund the construction of a new public hospital and upgrades to its road infrastructure. To secure the necessary capital, the county issues municipal bonds. A local insurance company might purchase these bonds as part of its investment portfolio. These municipal bonds are government securities because they represent a loan made to a local government (the county) for public projects. The insurance company, as the bondholder, receives interest payments from the county and will have its principal returned when the bonds mature.

• Example 3: International Sovereign Debt

  An international mutual fund manager is looking to diversify holdings and invest in stable economies abroad. The manager decides to purchase sovereign bonds issued by the government of Germany. These German bonds are government securities because they are debt instruments issued by a national government (Germany) to raise capital from global investors. The mutual fund lends money to the German government, expecting to receive regular interest payments and the return of its principal investment at the bond's maturity date.