To view the
printer friendly version Acrobat Reader is needed.
|
 |
THE BENEFITS AND RISKS OF INVESTING IN GOVERNMENT
SECURITIES
Investing is the art of balancing risk and return, so just
as with any other security, there are risks associated with
government securities. Two (2) possible risks are, (i) interest
rate and (ii) credit risks.
Credit risk is the risk that the issuer of the security,
in this case a government, will not be able to meet its obligation
to the holders of its securities. Investors can take into
consideration the government’s history of payments,
which can give an indication of the level of credit risk associated
with its existing or future securities. In addition the information
in the prospectus on the financial and economic position of
the government should also give an indication as to the level
of credit risk associated with its securities.
Interest rate risk is the risk that interest rates may rise
and hence create a decrease in the value of the price of the
security. Simply put the price of a debt security moves in
the opposite direction to the movements of interest rates.
If interest rates increase the price at which a debt security
trades will decrease. The reverse is also applicable.
In accordance with the concept of risk and return, the higher
the risk the greater the expected return on an investment.
The logic is that the seller of the high-risk security should
compensate the buyer for purchasing a security that has a
higher risk probability relative to other similar investments.
Government securities usually offer higher rates of return
than regular savings accounts or fixed deposits. It might
therefore be prudent to include the in the portfolio mix.
By diversifying your portfolio you can reduce the level of
risk.
Very often it is difficult to find the money to do the things
we need to do – pay educational expenses, buy a home,
cover medical emergencies, name it. One solution to this problem
could be to invest in each of the three (3) main types of
Government securities. Because they each mature at different
periods, they can be selected to meet specific needs. Bonds
and notes, for example, provide long-term savings options
and are ideal instruments for saving towards a new home, retirement
or the children’s education.
Treasury bills, on the other hand, which mature within a
year are better suited for savings towards short-term goals,
for example the well-deserved vacation, or a down payment
on a mortgage. In developing an investment portfolio it is
necessary to maintain a mix of long-term and short-term investments
that will mature to coincide with specific needs. This will
also provide protection to the portfolio from excessive exposure
to one dramatic market condition at any given time.
Notwithstanding the best planning in the world, investors
sometimes need to encash a security before maturity. The instrument
can be sold on the secondary market. Investors in the RGSM
can invest in securities offered by any of the eight (8) participating
Governments.
Information about the Government Securities Market and the
instruments being offered is readily available from licensed
intermediaries, Treasury and Finance Departments of participating
countries as well as from the ECCB, ECSE and participating
Government websites.
|
The Regional Government Securities Market