What Are Government Bonds?

Government bonds are a low-risk investment used by governments to finance budget deficits, infrastructure projects, and public services. They are a key tool in monetary and fiscal policy, influencing interest rates and liquidity in financial markets.

Key Features of Government Bonds:

Fixed Interest (Coupon) Payments:

Bondholders receive regular interest payments until maturity.

Varied Maturity Periods:

Bonds can be short-term (less than 1 year), medium-term (1-10 years), or long-term (over 10 years).

Tradability:

Bonds are traded in financial markets, affecting their price and yield based on demand and economic conditions.

How Governments Use Bonds:

To Fund Budget Deficits:

When government spending exceeds tax revenue, bonds provide a way to finance the shortfall.

As a Monetary Policy Tool:

Central banks buy or sell government bonds to control money supply and interest rates (e.g., quantitative easing).

To Provide a Safe Investment Option:

Government bonds are considered low-risk due to government backing, attracting investors during economic uncertainty.

Types of Government Bonds:

Treasury Bonds (T-Bonds):

Long-term bonds issued by governments, commonly in the US and UK.

Gilts:

UK government bonds issued by the Treasury.
Municipal Bonds: Issued by local governments or municipalities for infrastructure projects.

Inflation-Linked Bonds:

Adjusted for inflation to protect investors from purchasing power loss.