Government Bonds: Types, How They Work, and Their Risks
Written by Ilham Indra, Marketing Communication at PT Korea Investment Management Indonesia. Reviewed by Compliance before publication.
Government bonds are often called the safest instrument in the domestic market. That description is right about one thing and misleading about another.
What a Government Bond Is
A government bond is a debt security issued by the state to fund spending and development, promising periodic coupon payments and the return of principal at maturity. The buyer stands as a lender to the state.
Why Are They Called the Safest?
What is meant is that default risk is the lowest in the domestic market, because the issuer is the state. That is one kind of risk, not all of them.
Interest rate risk remains. Sold before maturity while rates have risen, the price is lower and the sale can produce a loss even though the state pays in full.
What Types Are There?
Group | Characteristic | Aimed at |
|---|---|---|
| Fixed coupon series | Coupon set at issuance through to maturity | Mainly institutional investors and the secondary market |
| Floating coupon series | Coupon adjusts periodically against a reference | Investors wanting a coupon that tracks a reference |
| Retail series | Issued periodically with an accessible minimum | Individual investors |
This article does not recommend any particular series and does not quote prevailing coupon rates, because those figures change with each issuance and would mislead anyone reading later.
How Is the Coupon Paid?
Coupons are paid periodically under the terms of each series, commonly every one, three or six months. The rate and schedule appear in each series' issuance documents.
What Are the Risks?
Interest rate risk — prices fall when market rates rise.
Liquidity risk — not every series is easy to sell at a fair price before maturity.
Inflation risk — a fixed coupon loses purchasing power when inflation rises.
Government bonds are not covered by deposit insurance, because that scheme applies to bank deposits. Their protection comes from the state's standing as issuer, not from a deposit guarantee.
Buy Directly or Through a Fund?
Buying directly gives certainty of maturity and control over the series chosen. Through a fixed income fund, money is spread across many series and managed by a licensed manager, but the fund itself has no maturity date.
A basic explanation of debt securities is available in our article on bonds.
About the Manager
PT Korea Investment Management Indonesia is an investment manager registered with and supervised by the Financial Services Authority under licence number [NOMOR IZIN OJK — DIISI KIM], operating in Indonesia since [TAHUN BERDIRI — DIISI KIM].
Frequently Asked Questions
Are government bonds risk-free?
No. Their default risk is the lowest in the domestic market, but interest rate risk remains. Sold before maturity while rates have risen, the price is lower.
Are they covered by deposit insurance?
No. That scheme applies to bank deposits. Protection on a government bond comes from the state's standing as issuer.
How do government and corporate bonds differ?
The issuer. Government bonds are issued by the state with the lowest default risk; corporate bonds are issued by companies, generally with higher coupons and issuer risk.
How large is the coupon?
Coupon rates differ by series and by issuance. The figures appear in each series' issuance documents and change over time.
Can a government bond be sold before maturity?
Yes, through the secondary market, with the caveat that the prevailing price may be above or below face value.
Better to buy directly or through a fund?
Direct purchase gives certainty of maturity and control over the series. A fund spreads money across many series under licensed management, but the fund itself has no maturity date.
Next Steps
Understand debt securities in our article on bonds.
See the range of funds managed by PT Korea Investment Management Indonesia on the Products page