Understanding government bonds

Understanding government bonds

Here in the UK, government bonds are called gilts. These bonds are an investment vehicle, which, until they expire, offer a fixed return rate. Gilts are effectively a loan from an investor to the government. The government pays out a fixed interest rate to investors until the date the bond reaches maturity.

When the bond reaches its maturity date, the government then pays the face value of the bond to the investor, also referred to as the bondholder.

Government bonds pay out a steady income to investors from the gilt’s fixed interest, which is also called the coupon rate. They also offer insight into the current market sentiment for the country issuing the bond, as inflation rates, currency strength and interest rates all affect bond prices.

What is the purpose of governments selling bonds?

Government bonds are made available for sale to raise funds for government spending – this may be for community projects or infrastructure. Here in the UK, bonds are used to assist future developments for life insurance and pensions markets. In France, bonds are known as OATs, in Germany, Bunds, and in the United States, they are referred to as treasuries.

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