Government bonds

Government bonds are bonds issued by a government in its own currency.

A government is always able to print more of its own currency with which to pay debt in its own currency. This means that there is no risk that a government will be unable to meet payment on government bonds, and the yield on government bonds is used to determine the risk free rate of return.

While there may be some sovereign risk that a government may choose to default, this is so unlikely that it can safely be disregarded under normal circumstances. Government short term zero coupon bonds are called treasury bills.

British government bonds are called gilts.

Index linked bonds

Some governments, including Britain's, issue index linked bonds. The payments of both the coupon and principalare adjusted for inflation, so the holder is guaranteed a known real return — at least if the bonds are held until maturity, if not, market prices may fluctuate, but not usually a great deal.

These are even safer than other government bonds as they also protect against inflation.

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