What Is a Government Bond?

J. Allen

A government bond, also sometimes called a treasury bond, is a savings bond issued or sold by a government. The money obtained from bond sales is typically used to support government projects and activities. A government bond usually offers a fixed interest rate, and at variable points of the term of the bond or at maturity it can be paid in full with interest. These bonds are generally considered a safe investment because they are guaranteed by the backing government, so they’ll never lose value. They may not gain as much as other investments, but the security and constancy makes them attractive to many investors. In many cases they’re also advantageous to governments because they provide immediate access to funds.

Series EE savings bonds are one type of government bond.
Series EE savings bonds are one type of government bond.

Basic Concept

Bonds are a common investment tool, and in general most work in about the same ways. All are backed by some larger entity that needs money immediately, and comes with a promise of repayment at a certain future date, usually with interest. The only thing that sets a government bond apart is its backer. These sorts of bonds are offered by local or national government agencies, and are normally guaranteed by the same. Investors usually put money down for a certain length of time — 5 year, 10 year, and 30 year bonds are among the most common — and once that time has expired, they can recoup the face value plus a certain percent interest, normally agreed to at the time of initial purchase. During the length of the bond life, the government can typically use the money as it sees fit.

Municipalities often issue bonds that can be purchased on the market to pay for public projects like new sports stadiums.
Municipalities often issue bonds that can be purchased on the market to pay for public projects like new sports stadiums.

Core Advantages

Government bonds are usually thought of as a “safe” or “low risk” investment, and they have several advantages for both agencies and investors. They’re almost always guaranteed and the interest rates, while not always stellar, almost always provide more than a standard savings account would. People who don’t need access to their money right away are often wise to consider the bond market for no other reason than its growth potential.

While stocks and other investment vehicles may in the long-term out perform a government bond in terms of interest accrued, bonds guarantee a return — something not generally expected from a stock. Some bonds also may have tax advantages. In the U.S., interest on bonds is often tax deductible, such that a consumer holding a federal bond can claim the interest earned as a tax deduction.

Variations by Location

Many different countries offer bonds as a means of generating government revenue, and some localities within countries — state or provincial governments, for instance — offer them, too. In the United States, the three basic types of government bonds include treasury bills or T-bills, treasury notes, and treasury bonds. The basic types generally are based on the maturity schedule of the bond. A treasury bill, for example, can be issued if the bond will mature in one year or less. Treasury notes have a longer maturity schedule of two to ten years. For a maturity of 10 years or more, the government can issue a treasury bond, with interest being paid semiannually.

Each country has its own variety of bonds available. The governments in the United Kingdom, South Africa, and Ireland for example, offer several types of bonds, often called gilts. These sometimes pay a fixed amount every six months until the gilt matures and the remaining balance is paid. Many gilts are actually held by insurance groups and pension funds.

Purchase Specifics and Requirements

In most cases there are many government bonds to choose from in the countries that offer them, and also many different terms. Some government bonds have minimum purchase requirements, for instance, and the highest interest rates are usually only available to investors who put down large sums. Others are only available to residents or citizens. Bonds typically are available at brokerage or investment firms and banks, and financial advisers at these locations are often able to give more personal advise to potential clients. Government websites typically also offer information on where to purchase bonds, minimum purchase requirements, and maturity details.

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