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What are government bonds? | IG Explainers



government bonds debt based investments were you loan money to a government in return for an agreed rate of interest they're widely regarded as one of the safest asset classes but how exactly do they work when you buy a government bond you're lending money to the government which will use the sun's rays to fund projects or infrastructure in return the government will make fixed interest rate payments at intervals specified by the bond coupon these payments continue until the bonds maturity date when the bond expires and you get your original investment back maturity dates range from a single year to 30 years or more so if you invest 1,000 pounds in a 10-year government bond with a 5% annual coupon you'll be paid 50 pounds every year for 10 years and when the bond expires after 10 years you'll get your original 1,000 pounds back just like shares bonds can be held as investments or sold to other traders on the open market when investors think they can get a better return elsewhere they may decide to sell their bonds if the supply of bonds increases to a level that exceeds demand this will cause the price of the bonds to fall but the amount paid out as coupons will not change so the yield on the bonds will rise if for example the price of our 1,000 pound ten-year bond fell to 900 pounds the interest rate will effectively rise from five percent to five point six percent as it would still pay 50 pounds an interest each year on top of this the bond holder would still receive one thousand pounds back at maturity one hundred pounds more than they paid the bonds price could also rise above its nominal value if this high demand for bonds for example if investors are struggling to find equivalent returns elsewhere in times of economic uncertainty of course in this scenario the bonds yield would fall and any investor would get back less than they paid when the bond matures with IG you can take a position whether you expect the price of bond to rise or fall the profit or loss you mate depends on the extent to which you get your prediction rights if you want to see more videos like this let us know in the comments below and don't forget to subscribe to I G

6 Comments

  1. TheRealNoodles
    TheRealNoodles May 23, 2019

    very misleading. That's not how it works in the real world. Bonds are a reserve drain function for the government. They also serve as risk free assets for fund portfolios. They only really exist because the private sector would like to hold them and the governemnt wants to get rid of excess banking reserves in the system, because it has a target to maintain. Otherwise if it didn't, the interest rate would deviate away from their official interest rate target.

  2. Thanks. Indeed, that was the best explanation I ever heard about " GOVERNMENT BONDS ". Please, borrow money to local bank with interest rate is it the same buying Government Bonds with interest rate? Are they the same thing?

  3. Venom Gaming
    Venom Gaming May 23, 2019

    Can a person ask for his/her money back before the bond is expired????

  4. Aesthetic Taehyung
    Aesthetic Taehyung May 23, 2019

    I have economics exams tomorrow. This has better enhance my understanding. Thanks!!

  5. SkinnySwag7
    SkinnySwag7 May 23, 2019

    That was great thank you! More videos like that would be awesome please 🙂

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