What Is A Government Bond

What is a government bond?

A government bond is:

  • A written promise or agreement – as in “being bound” or “my word is my bond” – which is usually contained in a writing or document called a “bond”
  • Which promise is made by a government, or a governmental or quasi-governmental agency, that includes State governments, county governments, municipal governments or “munis”, and various quasi-governmental agencies such as “bridge and port authorities”, “turnpike authorities”, “sewer authorities”, “water districts”, “economic development authorities” and others
  • Which usually includes an agreement to pay interest at a certain rate or according to a formula
  • On funds deposited, paid – or shall I say “loaned” – to the government
  • Which deposit or loan, when it comes to repayment, is typically backed by the “full faith and credit” of the government or agency
  • Which means backed by the taxpayers (within the jurisdiction of that governing agency) and the ability of that governing agency to fund expenses by imposing taxes or fees (such as bridge or highway tolls)
  • Which deposit is about as secure as an any agreement to re-pay can possibly be, thanks to the unlimited ability of citizens to pay taxes and fees. ;)
  • Which “bond interest” may either accumulate or be paid in installments, and which principal or deposit or “loan” (to the government) will eventually be repaid by the return of the principal payment, too
  • Which interest in many cases will, unlike other forms of interest, be tax free
  • Which “bond” amounts to loaning a government money to pay its expenses
  • Which loan often is used for the public good, in building infrastructure and other public projects
  • But which loans can also be used to enable deficit spending, i.e., spending on government activities without paying for them “in the here and now” by raising taxes

And that, my friend, is the short version answer to the question: “What is a government bond?”