Government bond

A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments, and to repay the face value on the maturity date. The ratio of the annual interest payment to the current market price of the bond is called the current yield. The yield tends to decrease when the government budget balance improves.

For example, a bondholder invests $20,000, called face value or principal, into a ten-year government bond with a 10% annual coupon; the government would pay the bondholder 10% interest ($2000 in this case) each year and repay the $20,000 original face value at the date of maturity (i.e. after ten years).

Government bonds can be denominated in a foreign currency or the government's domestic currency. Countries with less stable economies tend to denominate their bonds in the currency of a country with a more stable economy (i.e. a hard currency). International provide ratings for each country's bonds. Bondholders generally demand higher yields from riskier bonds; for example, during the Greek government-debt crisis, the spread (difference) in yields between two and ten-year Greek and German government bonds peaked at 260% and 40%, respectively. Governments close to a default are sometimes referred to as being in a sovereign debt crisis.