Government bond

A government bond is a bond issued by a national government denominated in the country's own currency. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes or simply print more money to redeem the bond at maturity.

As an example, in the US, Treasury securities are denominated in US dollars and are the safest US dollar investments. In this instance, the term risk-free means free of credit risk. However, other risks still exist: such as currency risk for foreign investors (for example non-US investors of US Treasuries would have received lower returns in 2004 because the value of the US dollar declined against most other currencies). Secondly, there is inflation risk - in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation outturn is higher than expected. Many governments issue inflation-indexed bonds, which protect investors against inflation risk.

Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Barter System

Barter System is that system in which goods are exchanged for goods. In ancient times when money was not invented trade as a whole was on barter system. This was possible only in a simple economy but after the development of economy, direct exchange of goods without the use of money, was not without defects. Some of the defects are following :->>

Exchange can take place between two persons only if each possesses the goods which the other wants e.g., if a weaver needs shoes and he has cloth to offer in exchange he should not only find a cobbler who makes shoes, but find such cobbler who needs cloth and is prepared to give shoes in exchange for it. In this case, it was difficult to find such a person.

Under barter system there was no measure of value. Even if two persons met together who wanted each other goods, they could not find a satisfactory equilibrium price. Under such conditions one party had to suffer.

It was difficult to divide a commodity without loss in its value e.g., a man who wants to purchase cloth equal to half the value of his cow and other commodities for the rest half value of cow; he could not divide his cow.