What Is A Government Bond?

What Is A Government Bond?

Before purchasing a government bond one has to understand the precise definition of what is a government bond. They are issued by the national governments promising to pay a certain amount of money on a specified date. Quiet often people confuse it with bonds which are debt instruments where the investor loans a particular amount of interest at a particular interest rate for a sixed tenure. These bonds are generally issued in the own currency of the government and if the government issues the bonds in foreign currencies they are known as sovereign bonds.

What Is A Government Bonds

If one understands what is a government bond the first and foremost important factor is that it is a risk free bond on all counts. The precise reason for it is that they cannot raise the taxes as well as create additional currency which paves way for the redemption of the bonds at maturity.  On the other side of the coin there have been instances also when the government has defaulted on the bonds as was seen in the case of Russia in 1998. Though this might be conferred that the situation is very rare and happens only during national bankruptcy.

What is a government bond simplifies that it is risk free and the first bond was issued way back in 1693 by the bank of England to raise money for the war against France. Tontine was the form accepted and it was later used by the various governments in the European countries to raise money as well as to fund for the war. This led to the emergence of perpetual bonds where there was no maturity date on the bonds and their prominence increased during this century. But the fact of the matter is that in the present times the Government Issue bonds of limited duration.

All said and done about what is a government bond there are various risks associated with it. First is the credit risk and second is the inflation.  For example in the country like United States all the treasury securities are nominated in the dollars and when one means credit risk, it replicates a scenario when it free from risks of any kind. In this case there are currency risks which generally happens in the case of foreign investors. This is a typical situation which happened when the US dollar weakened against the other currencies way back in 2008.  The second type of risk is inflation risk in which one gets lesser amount of principal on maturity when the inflation is higher than expected in the market for sure. Many governments in this regard have started issuing bonds which cover all the risks associated with inflations. All these provide vital clues to the fact on what is a government bond.

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