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.
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.
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.