What is a government bond?

A government bond is a debt security issued by a government to finance its expenditures. When investors purchase a government bond, they are essentially lending money to the government in exchange for periodic interest payments and the return of the bond's face value upon maturity. This type of investment is viewed as relatively safe, as it is backed by the government’s ability to generate revenue through taxation. Government bonds are an essential tool for funding public projects and managing national fiscal responsibilities, providing essential capital for infrastructure, education, and various public services.

The focus on the financing aspect is crucial, as it highlights the purpose of these bonds: to raise funds for government operations rather than to represent ownership stakes, which differentiates them from equity financing. This understanding is pivotal for those studying financial management functions, particularly in the context of how governmental entities operate within the economy.