Question

What are governments bonds? Why are banks willing to buy government bonds from the federal reserve?

Answer 1

1. Government bonds are bonds that are issued by the national government, these bonds usually pay periodic interests and they are repay at face value on the maturity date. Example of government bonds are saving bond and treasury notes. Different government bond has different maturity duration, this can be two, three, five or ten years.

2. Banks are willing to buy government bonds from the federal reserve because THEIR RESERVE BALANCE WILL INCREASE WHEN THEY SELL THE BONDS, thus injecting more money into the banking system.
The federal reserve may decide to sell or buy government bonds from commercial banks. Federal reserve use this move to regulate the amount of money that is available to the banks and ultimately to the society. When banks buy government bonds, their reserve balance decreases, but this is only for sometimes, because, they will make more money in return when they sell these bonds, thus increasing their reserve balance.

Answer 2

the Fed's main tool for controlling the money supply and influencing interest rates is called open market operations: the sale and purchase of U.S. government bonds by the Fed in the open market. ... Because member banks receive cash from the sale of the bonds, they increase their reserve balances when they sell them.

A government bond is a debt security issued by a governmentto support government spending. Federal government bonds in the United States include savings bonds, Treasury bonds and Treasury inflation-protected securities....