Government Bond

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 23, 2022

Government Bond Definition

A government bond, also called sovereign debt, is a form of debt security that is sold to investors to support government activities.

Unlike other investments that have a market risk premium built in, these bonds are low-risk because they are backed by the full faith and authority of the issuing government and its ability to print money.

Some government bonds pay periodic interest called coupon payments. These payments are based on the interest rate established by the Federal Reserve. Others do not pay coupons and are sold at a discount instead.

Functions of Government Bonds

US government bonds are sold by the US Treasury department at auctions throughout the year.

These bonds can also be traded in the secondary market through a broker as pooled investments or exchange-traded funds (ETFs) where they may sell at a discount or premium of their principal.

Why Bonds?

U.S. government bonds are close to risk-free; however other government issuers, particularly those in emerging markets, may carry additional risk.

The risk associated with government bonds is based on the economic strength of the country, its political outlook, and the stability of its central bank.

In addition, it is important to note the difference between government and municipal bonds. Unlike government bonds, municipal bonds are issued by cities, states, and counties to local governments to finance local projects and carry certain tax advantages for investors.

Government Bonds FAQs

What is a Government Bond?

A government bond, also called sovereign debt, is a form of debt security that is sold to investors to support government activities.

How are Government Bonds purchased?

U.S. government bonds are sold by the US Treasury Department at auctions throughout the year.

Why do investors purchase Government Bonds?

U.S. government bonds are close to risk-free; however other government issuers, particularly those in emerging markets, may carry additional risk.

Are bonds a low risk investment?

Unlike other investments that have a market risk premium built in, these bonds are low-risk because they are backed by the full faith and authority of the issuing government and its ability to print money.

What is the difference between government and municipal bonds?

Unlike government bonds, municipal bonds are issued by cities, states, and counties to local governments to finance local projects and carry certain tax advantages for investors.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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