Most people think of stocks and mutual funds when they hear the word "investments," but Federal bond issues are also a big part of the investments market as a whole. The US Federal Bond market does many times more business each year than the stock market as a whole. Even though Federal Bonds are thought to be the safest way to invest in the US, they are not completely unknown. The information below will help you get a general idea of how these bonds work.
How and why are they given out?
The Central Bank is the main group in charge of coordinating Federal bond issues. It starts by doing a market survey to find out what investors want from their investments right now. Consultations with investment dealers, banks, and other financial organisations that have experience with Federal bond issues are part of this survey. Before putting the bonds on the market, the Federal government needs to figure out exactly what they will be used for. They could be used to build a new road or bridge, pay off government debt, or fund another project that will help national taxpayers or other federal constituents. Also, the Federal government has to figure out ahead of time what the legal parameters are that are required by federal law.
Trying to sell the bonds
Depending on the size of the bond issue, the government can choose either a single underwriter or a group of them to market the bonds. The government has to give potential underwriters copies of a disclosure document that gives information about bonds so they can bid on the issue. To do this, the government hires a professional bond counsel firm that talks to the official government solicitor about the legal aspects of the situation. The law firm and the solicitor work together to make sure that the bond issues are legal and tax-approved according to federal and state law. This is done to make sure that the right legal steps are taken. Usually, the marketing phase of a Federal Bond issue lasts a week. During this time, potential underwriters look over the terms and conditions of the issue and decide whether or not to buy it. This helps them come up with a good bid price. This process is done away with if the government chooses a single underwriter based on how well they know that person from the past. If there are going to be more than one underwriter, the government lets everyone who wants to buy the bonds put in a purchase bid. This bid includes general terms and conditions, the length of the bond issue, the amount of the bonds, the interest rates, the amortisation schedule, and details about prepayment provisions.
Completing documentation requirements
In the last step of issuing Federal bonds, the appointed underwriter sends the purchase price by wire to the paying agent. The paying agent then sends the cost of issuance back to the underwriter, according to the terms and conditions. The paying agent is also in charge of getting the money to the right people or projects, based on the original goal set at the beginning of the Federal bond issue. The law firm then makes copies of the closing documents and sends them to everyone involved in the case.
The closing documents are very technical, and you would need to be a lawyer to understand the information they contain. These papers show that all of the terms and conditions of the purchase proposal have been agreed to.
The basic information above will help you understand how Federal Bond issues work in the real world. By putting some of your savings into Federal Bond issues, you can protect yourself from risks that are common in other types of investments, like stocks and derivatives.
