A government bond is a debt instrument issued by a government for a period of more than one year with the purpose of raising finances by borrowing.
Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When investors buy a bond issued by a government, they become a creditor of the government.
Advantages of government bonds to the investor:
- Offer tax advantages as interest received on the invested sum is usually tax-exempt;
- Guaranteed payment of principal and interest;
- Provide regular income to the investor thereby making it more predictable than stocks;
- Offer a very high level of security.
Advantages of government bonds to the state:
- Provide an alternative method for financing both on-going and new projects for the benefit of citizens
- The cost of debt is pre-determined because of the fixed nature of the interest payable on the bond thereby aiding the government in determining to a large extent the amount of debt to be raised that will enable the government to execute its projects.