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Concept
Government bond
Summary
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.
For example, a bondholder invests 2000 in this case) each year and repay the $20,000 original face value at the date of maturity (i.e. after 10 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). When governments with less stable economies issue bonds, there is a possibility they will be unable to repay bondholders, resulting in a default. All bonds carry a default risk. International credit rating agencies provide ratings for each country's bonds. Bondholders generally demand higher yields from riskier bonds. For instance, on May 24, 2016, 10-year government bonds issued by the Canadian government offered a yield of 1.34%, while 10-year government bonds issued by the Brazilian government offered a yield of 12.84%.
Governments close to a default are sometimes referred to as being in a sovereign debt crisis.
The Dutch Republic became the first state to finance its debt through bonds when it assumed bonds issued by the city of Amsterdam in 1517. The average interest rate at that time fluctuated around 20%.
The first official government bond issued by a national government was issued by the Bank of England in 1694 to raise money to fund a war against France. The form of these bonds was both lottery and annuity. The Bank of England and government bonds were introduced in England by William III of England (also called William of Orange), who financed England's war efforts by copying the approach of issuing bonds and raising government debt from the Seven Dutch Provinces, where he ruled as a stadtholder.
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