# What Is a Government Bond?

> **Definition**
>
> A government bond is a debt instrument issued by federal, state, and local governments to raise capital to support public spending.

## What Is a Government Bond?

A government bond is like an IOU from the government. When it needs money, the government can borrow by selling bonds, and you become the lender. The government promises to pay you the full amount of your investment (the principal) on the maturity date. In the meantime, you also get regular interest payments or coupon payments, usually at a fixed rate. The money you lend the government is used to pay for social programs, healthcare, infrastructure projects, and to pay off public debt. Investors like government bonds because they offer a steady source of income (albeit low) and are relatively low-risk.

### Key Takeaways

*   A government bond is a fixed-income instrument.
*   Governments issue bonds to investors when they want to raise money.
*   Money raised is used to fund social programs, pay debts, and build infrastructure.
*   Government bonds are generally safe and low-risk.

![Government Bond: A debt security issued by a government to support government spending and obligations.](https://www.investopedia.com/thmb/OfWyjyEKYQ7dsHah-M9h6FM1f6M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/government-bond.asp-final-06b10b01401d4b5e92224e885750ea63.png)

*Government bonds offer investors safety while supporting public projects and national growth. — Investopedia / NoNo Flores*

## Types of Government Bonds

*   **Municipal Bonds:** Local governments issue [municipal bonds](https://www.investopedia.com/terms/m/municipalbond.asp) to fund infrastructure, libraries, or parks. These "munis" often carry tax advantages and exemptions for investors. Munis may be supported by local tax dollars or revenue from a project like a toll road. Municipal bonds commonly provide investors with lower interest rates than riskier investments like [corporate bonds](https://www.investopedia.com/terms/c/corporatebond.asp) or stocks.
*   **U.S. Savings Bonds:** The U.S. Treasury offers series [EE bonds](https://www.investopedia.com/terms/s/serieseebond.asp) and series I savings bonds. Bonds sell at face value and have a fixed rate of interest. Bonds held for 20 years will reach their face value and effectively double. Series I bonds receive a semi-annually calculated secondary rate tied to an inflation rate.
*   **Treasury Bills (T-Bills):** Short-term securities from four weeks to 52 weeks. Bills are sold at a discount or face value. When the bill matures, investors are paid its face value.
*   **Treasury Notes (T-Notes):** Intermediate-term bonds maturing in two, three, five, or 10 years that provide fixed coupon returns. [Treasury notes (T-notes)](https://www.investopedia.com/terms/t/treasurynote.asp) typically have a $1,000 face value. However, two- or three-year maturities have a $5,000 face value.
*   **Treasury bonds (T-Bonds):** Long-term bonds with a maturity between 20 to 30 years. [Treasury bonds (T-Bonds)](https://www.investopedia.com/terms/t/treasurybond.asp) give interest or coupon payments semi-annually and have a minimum investment of $100. The bonds help to offset shortfalls in the federal budget. Also, they help to regulate the nation's money supply and execute U.S. [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp).
*   **Treasury inflation-protected securities (TIPS):** Indexed to inflation, [Treasury inflation-protected securities (TIPS)](https://www.investopedia.com/terms/t/tips.asp) protect investors from the adverse effects of rising prices. The par value, or principal, increases with inflation and decreases with deflation, following the [Consumer Price Index (CPI)](https://www.investopedia.com/terms/c/consumerpriceindex.asp). These securities with maturities of five, 10, or 30 years pay a fixed rate of interest determined on the bond's auction on a six-month basis.  
    

## Bond Terms

*   **[Face](https://www.investopedia.com/terms/f/facevalue.asp) or Par Value**: the amount of debt bondholders loan the government and the amount they will get back when the bond matures
*   [**Coupon**](https://www.investopedia.com/terms/c/coupon-rate.asp): the regular interest payments credited to bondholders
*   [**Yield**](https://www.investopedia.com/terms/b/bond-yield.asp): the interest rate on the bond after accounting for its market price
*   **Market Price:** the price of the bond in the secondary market, which may differ from the face value
*   **Treasuries**: U.S. federal government bonds

## How to Buy Bonds

Investors who [buy government bonds](https://www.investopedia.com/articles/bonds/08/treasuries-fed.asp) and hold them until maturity enjoy regular interest payments and a return on their initial investment. The price of a government bond will fluctuate in the market. Bond prices have an inverse relationship with interest rates⁠—so when interest rates go up, government bond prices go down in the secondary market.

The [U.S. Treasury Department](https://www.investopedia.com/terms/u/ustreasury.asp) sells issued bonds [during auctions](https://www.investopedia.com/articles/basics/04/052104.asp) throughout the year. Only certain registered participants, often large banks, can buy U.S. government bonds directly at auction. When the government holds a bond auction, each buyer submits its purchase bid, and the auction continues until all the bonds are duly distributed.

Some bonds are traded in the [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp). Individual investors can buy and sell previously issued bonds through this marketplace. Treasuries are widely available for purchase through the U.S. Treasury, brokers, and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp), a basket of securities.

> **Warning**
>
> Fixed-rate government bonds have interest rate risk when interest rates rise and investors hold lower-paying fixed-rate bonds. If a fixed-rate government bond pays 2% per year and prices rise 1.5%, the investor earns only 0.5% in real terms.

## Foreign Government Bonds

U.S. Treasuries are regarded as nearly [risk-free](https://www.investopedia.com/terms/r/risk-freerate.asp) investments, however, those floated by other countries may carry a greater degree of risk. Due to this risk-free nature, market participants and analysts use Treasuries as a benchmark in comparing the risk associated with securities. The 10-year Treasury bond is also used as a benchmark and guide for interest rates on lending products.

Other government-backed bonds, particularly those in [emerging markets](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp), carry regional, political, and central bank risks. Investors saw a bleak reminder of how risky some government bonds can be during the [Asian financial crisis](https://www.investopedia.com/terms/a/asian-financial-crisis.asp) of 1997 and 1998. During this crisis, several Asian nations were forced to devalue their currency, which sent reverberations around the globe.

## Pros and Cons of Government Bonds

Government bonds provide both benefits and disadvantages to the bondholder. These debt securities tend to return a steady stream of interest income. However, this return is usually lower than other products on the market due to the low level of risk.

The market for U.S. government bonds is very liquid, allowing the holder to resell them on the secondary bond market easily. Some ETFs and [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) focus their investment on Treasury bonds.

Fixed-rate bonds may fall behind during increasing inflation or rising market interest rates. Also, foreign bonds are exposed to sovereign or governmental risk, and changes in currency rates, and have a higher risk of default. 

Pros

*   Low risk of default for U.S. bonds
    
*   A liquid market for reselling
    
*   Assessable through mutual funds and ETFs
    

Cons

*   Offer low rates of return 
    
*   Carry risk when market interest rates increase
    
*   Default and other risks on foreign bonds
    

## How Do Investors Buy Government Bonds?

U.S. Treasury securities are available to investors through their broker, bank, or the [TreasuryDirect](https://www.investopedia.com/terms/t/treasurydirect.asp) website. Investors can also look to ETFs or mutual funds that invest in Treasuries. Municipal bonds are available from a broker.

## How Does the U.S. National Debt Relate to Bonds?

In the U.S., the [national debt](https://www.investopedia.com/updates/usa-national-debt/) refers largely to the notional value of outstanding government bonds. The largest portion of the national debt, approximately $28.2 trillion, is publicly held. Intragovernmental holdings make up nearly $7.1 trillion, for a total debt of around $35.3 trillion as of Q3 2024.

## How Does the Federal Reserve Use Bonds for Monetary Policy?

Government bonds help fund deficits in the federal budget and are used to raise capital for various projects such as infrastructure spending. However, government bonds are also used by the Federal Reserve Bank to [control the nation's money supply](https://www.investopedia.com/terms/o/openmarketoperations.asp). When the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) repurchases U.S. government bonds, the money supply increases as sellers receive funds to spend or invest in the market. Any funds deposited into banks are used to loan money to companies and individuals, further boosting economic activity.

## What Are Example of Non-U.S. Government Bonds?

Foreign governments issue debt in the form of bonds. Some of these commonly include U.K.[Gilts](https://www.investopedia.com/terms/g/gilts.asp), German [Bunds](https://www.investopedia.com/terms/b/bund.asp), French OATs, and Japanese [JGBs](https://www.investopedia.com/terms/j/jgb.asp).

## The Bottom Line

Government bonds carry a risk-free rate of return but come with lower yields. In the U.S., federal bonds are known as Treasuries. Foreign governments also issue bonds. State and local governments issue municipal bonds that may offer certain tax exemptions.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission, Investor. "[Bonds](https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds)."
>     
> 2.  Municipal Securities Rulemaking Board. "[Municipal Bond Basics](https://www.msrb.org/Municipal-Bond-Basics)."
>     
> 3.  TreasuryDirect. "[Comparing EE and I Bonds](https://www.treasurydirect.gov/savings-bonds/comparing-ee-and-i-bonds/)."
>     
> 4.  TreasuryDirect. "[Treasury Bills](https://www.treasurydirect.gov/marketable-securities/treasury-bills/)."
>     
> 5.  TreasuryDirect. "[Treasury Notes](https://www.treasurydirect.gov/marketable-securities/treasury-notes/)."
>     
> 6.  TreasuryDirect. "[Treasury Bonds](https://treasurydirect.gov/marketable-securities/treasury-bonds/)."
>     
> 7.  TreasuryDirect. "[Treasury Inflation Protected Securities (TIPS)](https://www.treasurydirect.gov/marketable-securities/tips/)."
>     
> 8.  TreasuryDirect. "[When Auctions Happen (Schedules)](https://www.treasurydirect.gov/auctions/when-auctions-happen/)."
>     
> 9.  TreasuryDirect. "[Who May Bid? Questions and Answers](https://www.treasurydirect.gov/auctions/how-auctions-work/who-may-bid/)."
>     
> 10.  TreasuryDirect. "[How Auctions Work](https://www.treasurydirect.gov/auctions/how-auctions-work/)."
>      
> 11.  TreasuryDirect. "[About Treasury Marketable Securities](https://www.treasurydirect.gov/marketable-securities/)."
>      
> 12.  Federal Reserve History. "[Asian Financial Crisis](https://www.federalreservehistory.org/essays/asian-financial-crisis#:~:text=July%201997%E2%80%93December%201998,and%20Eastern%20Europe%20in%201998.&text=On%20July%202%2C%201997%2C%20Thailand,relative%20to%20the%20U.S.%20dollar.)."
>      
> 13.  U.S. Department of the Treasury, FiscalData. "[Debt to the Penny](https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny)."