When it comes to investing in government securities, it’s essential to know the difference between treasury bills and government bonds. Many individuals have a hard time distinguishing the two and often ask questions about their differences. Therefore, in this article, we will define and distinguish the two types of government securities. We will explore their terms, how to make money from them, and whether one can invest in both at the same time.
What are Government Securities?
Before we dive into the differences between treasury bills and government bonds, let’s first understand what government securities are. Government securities are debt instruments issued by a government to the public in exchange for money. They are a way for the government to raise funds for various purposes such as infrastructure development, funding social welfare programs, or to finance budget deficits.
Treasury Bills:
Treasury bills are short-term debt instruments issued by the government with a term of fewer than 12 months. Investors who purchase treasury bills are essentially lending money to the government for a short period and are paid interest on their investment at the end of the investment period.
When it comes to making money from treasury bills, investors earn interest income, also known as the discount, which is the difference between the face value of the bill and the cost value. However, it’s essential to consider that the interest income is subject to various deductions such as handling fees of 1% and withholding tax of 15%, resulting in an amount less than the face value of the bill.
Government Bonds:
Government bonds are long-term debt instruments with a term duration of more than 12 months. In Zambia, government bonds have terms ranging from two to ten years. Investors who purchase government bonds are essentially lending money to the government for an extended period and are paid interest on their investment either annually or every six months.
The benefit of investing in government bonds is that investors can earn two sources of income: coupon income and interest income. Coupon income is the interest paid to bondholders annually or every six months, depending on the terms of the bond. This makes investing in government bonds attractive to individuals who want to earn regular income from their investments without waiting for the bond’s maturity date. On the other hand, interest income is the difference between the face value and the cost value of the bond at the time it matures, and it’s paid to bondholders at the end of the bond’s term. It’s essential to note that coupon income is subject to a handling fee of 1% and withholding tax of 15%, while interest income is not charged any fees or taxes.
Investing in Both Treasury Bills and Government Bonds:
Investing in both treasury bills and government bonds at the same time is possible and depends on an individual’s investment plan and financial goals. If an individual needs their money back in 12 months, then investing in treasury bills would be ideal. However, if an individual has enough funds, they can consider investing in longer-term government bonds lasting two years or more. It’s essential to have a financial plan and decide which option works best for your investment goals and objectives.
In conclusion, understanding the differences between treasury bills and government bonds is essential when it comes to investing in government securities. Treasury bills are short-term debt instruments with a term of fewer than 12 months, while government bonds are long-term debt instruments lasting for more than 12 months. When it comes to making money from these investments, treasury bills pay interest income at the end of the investment period, while government bonds pay coupon income and interest income. Investors can invest in both treasury bills and government bonds depending on their investment plans.
