What is a government bond, and how do they work/function?
In: Economics
Essentially look at it as if the government is taking a loan out from you.
You give the government some amount of money now, and they will pay you back at a specific time in the future. The difference from a conventional loan that you would take is that there is no payment until the entire thing is paid in full.
In addition, the holder of the bond can sell it away to someone else. The bond can be traded on the secondary market so that the person holding it can still get some value out of it before it pays out. Because the value at the end is guaranteed, you never lose money on them (except for trading fees), but the growth is relatively low compared to other investments. It’s a good place to store some investment money for low-risk low-reward plays, but it’ll never pay out as much as the highest risk plays.
Well, there are many different types of bonds, but basically it is a way for the government to raise money now, with an obligation to pay it back later. It is a kind of loan.
You, the citizen, purchase the bond giving the money to the government which they use to fund various programs.
The bond typically has a fixed interest rate. For example, Savings Bonds (probably the most common kind), double their value over 20 years. Turn it in after 20 years and you get back double what you paid for it.
A government bond is how the government borrows money from investor. They sell the bonds to collect money today, and repay it in the future with interest.
There are different types of government bonds issues on all levels of government, from a local school district issuing bonds to pay for building a new school, to the Federal government selling bonds to cover wars or COVID stimulus… the outstanding bonds are what’s considered the federal government’s debt.
A bond will have a set interest rate and time frame for repayment, so a bond with 5% interest rate and 20 year repayment would pay you 5% interest on the amount you purchased each year (typically paid every 6 months), and then return your principal at the end.
Latest Answers