• Government bonds are an important part of a personal portfolio.briefcase image by Orlando Florin Rosu from Fotolia.com
  
  A personal investment portfolio should be divided into four broad asset categories: cash or other liquid holdings, such as money market shares; stocks; debt, such as corporate or government bonds; and physical assets, such as real estate or commodities.
  
  

Liquidity and Transparency

• The causes of changes in value for public debt are more transparent than for equity.transparence (2) image by fotogis?¡§le from Fotolia.com
  
  Bonds, especially those issued by the governments of prosperous industrialized nations, are sold in liquid markets. Thus the buyer of a bond can choose to hold to maturity, or can sell almost at will. This is an advantage of bonds in contrast to a real estate or private equity holdings, which may prove illiquid.
  
  Further, bond markets -- especially for sovereign bonds -- are very transparent. They react to public macro-economic news, so that a buyer need not worry that an "insider" who knows better than he is taking advantage of him. This is an advantage of bonds in contrast to stocks.
  
  

Safety and Taxes

• Study the tax consequences of bond income.tax forms image by Chad McDermott from Fotolia.com
  
  Government bonds, especially the bonds of the United States and the United Kingdom, have a reputation for safety. Neither the U.S. nor the U.K. has ever defaulted. Their bonds are often called "no-risk instruments." The income from U.S. Treasury securities is exempt from local and state taxes, although it is subject to federal taxes.
  
  Interest income received by holders of municipal bonds in the United States (issued by a local government or an agency such as a school district or a transit authority) is often exempt from federal income tax as well as the income tax of the state in which the issuing municipality is located.
  
  

Municipal Bonds

• Not all government bonds are created equal. Municipal bonds in particular, though they are low-risk, are not zero risk. For example, Orange County, Calif., defaulted on its bonds in 1994.
  
  The historic default rate for all rated municipal bonds is less than 1 percent, according to the registered investment adviser Buckingham Asset Management.
  
  

Inflation-Linked Bonds

• The virtual absence of default risk attributed to some government bonds, those issued with the full faith and credit of a sovereign with both currency creation and taxing authority, does not mean that there are no risks of any sort. There may be the risk, for example, that inflation will exceed the buyer's expectation and make the real return on the bond a negative one.
  
  Many governments address the issue of the inflation risk by issuing inflation-linked bonds, sometimes just known as "linkers."