Definition and Characteristics of Book-entry Government Bonds
Book-entry government bonds (BeGBs) are debt securities that are issued in the same way as paper-format bonds, but which are not issued in paper form. Instead, the investor is assigned ownership of a bond through an electronic entry in a controlled registration system maintained by the issuers, brokers or other authorized agents. The BeGBs are not distributed physically; instead, they are electronically delivered by the buyers to the sellers during transactions, whereby a debiting and a crediting of the bond account occur in the issuing agent’s records, followed by the system updated entries reflecting the change of ownership status.
The advantages of the book-entry bonds include cost savings to the issuer in terms of printing and mailing costs, easing the secondary market transactions through the increased liquidity and speed of trading, and eliminating potential risks associated with the physical certificates. Moreover, it prevents forgery, reduces the operational cost for the buyers/sellers and makes it easier to reinvest the proceeds of matured bonds in other bonds of the same issuer.
The book-entry bonds are typically issued in large denominations and can often be split into smaller amounts. BeGBs are usually denominated in a certain currency and have a face value, a coupon rate and a maturity date. The holders of the BeGBs have a right to receive periodic interest payments calculated as a percentage of their investment, until the maturity date is reached. Prior to maturity, the BeGBs are usually tradable and active on a certain market.
In most cases, the book-entry government bonds that are issued in more than one tranche have the same characteristics and are offered at the same time, as a single amount through a single placement. This enables the issuer to reach a large number of potential investors and to raise the desired amount of capital for the government’s needs. On the other hand, there can also be instances where the bonds are issued in individual and separate tranches, with separate terms, such as maturity dates, coupon rates, and even different currencies.
The book-entry government bonds can be issued in two formats – ‘yield’ or ‘discount’. At the time of issue, the yield bonds are priced at their face value and then subsequently traded for prices that reflect their yields. On the other hand, the discount bonds are directly issued at a discounted price, with the difference between their face values and their prices representing the yield. The benefit of discount bonds to the buyers is that they earn higher yields on their investments, while paying lower prices than their face values.
The book-entry government bonds market is continuously growing and evolving, as the demand for liquid and efficient debt markets is increasing. Governments recognize the potential benefits of using the BeGBs to finance their operations, and the use of modern, book-entry technology is becoming increasingly popular among investors.
In conclusion, book-entry government bonds (BeGBs) provide a more efficient and cost-effective way of raising capital for government operations and offer many benefits to both investors and issuers. BeGBs are issued in a specific currency, denomination, coupon rate, and maturity date, as well as in either yield or discount format. The BeGBs also help to reduce the costs associated with issuance and trading of the bonds and introduce higher liquidity in the markets.
