Glossary Bonds


Governments play a critical role in the world of finance. Through legislation, they set the basic boundaries for what is permissible and what is not; through fiscal and monetary policy, they manage the evolution of the economy as a whole; and through their own financing needs, they exert an enormous effect on the financial markets.

It is not uncommon for governments to spend more money than they take in revenue in any given year. When that happens, the government must issue debt instruments called bonds to raise capital.

The government makes periodic interest payments to bond holders, then redeems the capital value of the bond once its term has expired. Because governments are regarded as the epitome of solidity, extremely unlikely to go bankrupt or to default on debts, the interest that is paid on bonds tends to set a baseline for those of the financial markets as a whole. Government bonds are regarded as the safest form of investment with, consequently, the lowest financial return. Other financial instruments will be priced relative to their risks in relation to government bonds.

Opinions differ on the proper role of governments in economic affairs. Some favor active intervention by the government to promote economic growth and well-being; others believe that governments tend to do more harm than good and should instead adopt a stand-off laissez-faire approach.