Government bonds are essentially a way for a government to borrow money from individuals or institutions in order to finance its operations or fund specific projects. When you purchase a government bond, you are essentially loaning money to the government.
Here’s how it works:
The government issues a bond with a set face value, which is the amount of money that the government will borrow.
The bond also specifies a fixed interest rate, which is the rate at which the government will pay you back for loaning them money.
Investors can then purchase these bonds at the face value, which the government will pay back, plus the interest rate over a set period of time. This period of time is known as the bond’s maturity date.
Throughout the life of the bond, the investor will receive regular interest payments, usually on a semi-annual basis.
At the bond’s maturity date, the investor will receive the face value of the bond, which is the amount they originally invested.
Government bonds are generally considered to be a low-risk investment because they are backed by the full faith and credit of the government. This means that the likelihood of the government defaulting on its debt obligations is very low, making it a relatively safe investment option. However, because they are low-risk, they also tend to have lower returns than other types of investments, such as stocks or corporate bonds.