Features of Treasury Bonds as Types of Securities

Types and Features of Securities

Meaning of Security

A security is a financial instrument or asset that represents a financial claim, ownership interest, or debt in an individual, company, government, or other organisation. Securities are bought and sold by investors in financial markets and may provide returns through interest, dividends, or an increase in value. 

Common examples of securities include ordinary shares, preference shares, bonds, debentures, and Treasury bonds. For example, when a person buys shares in a company, the shares represent part ownership of that company, while a bond represents money lent to the issuing government or organisation. 

Treasury Bonds

A Treasury bond is a long-term debt security issued by the government to raise money from individuals, financial institutions and other investors. 

When an investor buys a Treasury bond, the investor is lending money to the government for a specified period. In return, the government agrees to pay interest to the investor at stated intervals and repay the original amount borrowed when the bond reaches its maturity date. 

Treasury bonds are therefore an important instrument through which governments raise funds for financing public expenditure and development projects. 

Features of Treasury Bonds

1. Issued by the Government
Treasury bonds are debt securities issued by the government to raise money from the public and institutional investors. 

When investors buy Treasury bonds, they are effectively lending money to the government. The government uses the funds raised to finance government expenditure, infrastructure, development programmes, and other approved activities.

2. Long-Term Investment
Treasury bonds are generally long-term financial instruments. This means that the government borrows the money for a relatively long period before it is required to repay the principal. 

The maturity period depends on the particular bond issued and may run for several years. This makes Treasury bonds different from Treasury bills, which are short-term instruments.

3. Payment of Interest
Treasury bonds normally provide investors with interest payments at specified intervals according to the terms of the bond. 

The interest represents the return earned by the investor for lending money to the government. The rate and payment schedule are determined when the bond is issued.

4. Repayment of Principal at Maturity
At the maturity date, the government is expected to repay the principal amount borrowed from the investor, subject to the terms of the bond. 

For example, if an investor purchases a ₦1 million treasury bond and holds it until maturity, the principal amount is normally repaid at the end of the specified period, in addition to any interest payments due under the bond.

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5. Tradable in the Secondary Market
Treasury bonds can generally be bought and sold by investors before their maturity through an organised secondary market. 

This gives investors an opportunity to convert their investment into cash without necessarily waiting until the bond reaches maturity. However, the selling price may be higher or lower than the amount originally paid, depending on market conditions.

6. Relatively Low Credit Risk
Treasury bonds are generally regarded as relatively low-credit-risk investments because they are obligations of the government that issued them. However, low credit risk does not mean that there is absolutely no risk. Investors can still face risks such as changes in market interest rates, inflation, and changes in the market value of the bond.

7. Used to Finance Government Activities
The money raised through treasury bonds can be used by the government to finance public expenditure and long-term development activities. 

Such expenditure may include infrastructure, education, healthcare, transportation, and other government programmes. Treasury bonds therefore provide a means through which the government can obtain funds without relying entirely on current tax revenue.

8. Can Provide a Regular Source of Income
Treasury bonds can provide investors with regular income through scheduled interest payments. This feature can make them useful to investors who want predictable cash flows from their investments. The exact frequency and amount of payment depend on the terms of the particular bond.

Summary

• Long-term debt securities issued by the government.

• Used to raise funds for government activities and projects.

• Pay interest according to their terms.

• Have a maturity period.

• Can generally be traded in the secondary market.

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