Why is it worth investing in government bonds, and what kind of profit and risks do such investments entail?

Lately, I have been constantly hearing about the acquisition of cryptocurrencies, stocks, NFT paintings, tweets, logos. But in this blog, I will talk about a more traditional investment offer — government bonds, considering its target audience, risks and prospects. Why should you consider buying bonds, rather than another volatile digital coin?

I will start from the very beginning — an explanation of what the internal government bonds are. Imagine that the state borrowed money from me — the owner of the securities — and pledged to return it with the established interest within the agreed time frame. I receive such bonds in electronic form. Their issuance or placement is part of the budgeting process. This process’s nuances and mechanisms are regulated by the Budget Code and the Law of Ukraine On the State Budget for the corresponding year. The issue of government securities and the size of the issue are established by the Ministry of Finance of Ukraine (issuer) depending on the amount of external and internal government debt. Government bonds are sold to dealers and their clients in the primary market to finance the needs of the state budget of Ukraine. The institution that maintains centralized accounting in non-documentary form is the NBU.

I consider government securities as the most reliable bonds in Ukraine, since their redemption in full (100% of the amount) is guaranteed by the state. A significant plus is that the issuer’s income on government bonds is guaranteed, and the interest rate is fixed for the entire period of the issue. This means that the investor will receive his income regardless of the general state of the stock market, foreign policy circumstances, the exchange rate of the national currency against the dollar, etc. Moreover, such investments are not subject to tax and military tax for individuals. Long-term government bonds can bring 9–11% yield in hryvnia, 4–5% in dollars and 3–5% in euros.

But the main catch lies in the fact that the amount of investment must be at least 200 thousand hryvnias to get the desired profit. The threshold for entering government securities to earn money on investments is approximately $10 thousand in equivalent since the investor pays commissions to the broker and the bank. Interest rates on government bonds are not as high as on risky investment instruments, since this is an asset with a guaranteed return. Therefore, to make a lot of money, you need a lot of bonds. You will be able to enter a deal with amounts of several thousand dollars per 1 bond, but then the question arises, is it not better to use a deposit? After all, the commission to the broker and the bank can “eat up” your profit.

Today, the most frequent buyers of government securities are banks and foreign investors. Individuals represent an insignificant percentage of the market. Perhaps the reason for this was just the high entry threshold. Professional market participants — bonds traders, as well as banks — have access to the bonds stock exchanges. Banks can set high minimum amounts for the purchase of government bonds and high fees for services. Therefore, government bonds are often purchased through brokers who are licensed to conclude contracts on the exchange. Securities purchased through an agent belong directly to the investor.

The government bonds market is considered reliable and stable for the investor because it is supported by the state. I have listed the benefits of buying bonds for a company and a private investor, and also named several stop factors. The main thing — do not forget to consider your specific case and financial capabilities, because you can choose the most profitable investment instrument for each situation.