A government bond is a debt security: an investor lends money to a government, which agrees to make payments under the bond’s terms and repay principal at maturity. The term covers securities issued by national and subnational governments, so terms, currencies, risks, and taxes vary. U.S. Treasury securities are a useful example, not a universal rule.
How do government bonds work?
When a government issues a bond, it borrows from investors. The bond sets out the payment schedule, maturity date, and principal repayment terms. The issuer must meet those obligations; “government-issued” does not mean every bond is interchangeable or without risk.
Governments use securities to finance public needs. The U.S. Treasury says its primary debt-management goal is to “finance the government at the lowest cost over time” (U.S. Treasury: Financing the Government).
For scale, the Bureau of the Fiscal Service reported that in 2024 it held 440 public auctions and issued about $28.5 trillion in Treasury marketable securities. That is the value issued during that year, not the amount of federal debt outstanding (Treasury Bulletin).
What kinds of U.S. Treasury securities are there?
The Treasury’s marketable securities include bills, notes, bonds, Treasury Inflation-Protected Securities (TIPS), and floating-rate notes (FRNs). In casual conversation, “Treasury bonds” can mean federal debt generally. TreasuryDirect uses “Treasury Bonds” for one specific long-term security.
| Security | Term or payment structure | How it differs |
|---|---|---|
| Treasury bills | Mature in one year or less. | Sold at face value or at a discount and pay face value at maturity; the difference is the interest. |
| Treasury notes | Issued in 2-, 3-, 5-, 7-, or 10-year terms. | Fixed-rate securities; Treasury pricing guidance explains how their price relates to yield and coupon. |
| Treasury bonds | Mature in 20 or 30 years. | Pay fixed interest every six months, at a rate set at auction. |
| TIPS | Term details not stated on the cited category page. | Principal adjusts with inflation and deflation. |
| Floating-rate notes (FRNs) | Term details not stated on the cited category page. | Interest rate floats rather than remaining fixed. |
See the Treasury’s descriptions of marketable securities and Treasury bonds. Treasury bonds are distinct from savings bonds such as EE, I, and HH bonds.
What are coupon rate, price, and yield to maturity?
A bond’s coupon rate is its stated interest rate; yield to maturity is an annualized return measure that accounts for the purchase price and the security’s cash flows. They are not the same thing. For a Treasury bond or note, the relationship between yield to maturity and coupon rate helps determine whether the market price is below, above, or at face value:
- If yield to maturity is higher than the coupon rate, the price is below face value.
- If yield to maturity is lower than the coupon rate, the price is above face value.
- If the two rates are equal, the price is at face value.
As a result, an existing fixed-rate bond can lose market value when comparable yields rise, and gain value when comparable yields fall. A coupon is not a promise of a particular total return in every circumstance: purchase price and the timing of a sale also matter. Treasury’s guide explains Treasury marketable-security pricing. Its published par yield curve and constant maturity rates describe past and present rates; the Treasury says it does not forecast future rates (Treasury interest-rate data).
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U.S. Treasury marketable securities are transferable and can be sold before maturity. Their sale price may be higher or lower than face value, so an early sale can produce a gain or a loss. The amount depends on the market price when you sell, not just the coupon you received. TreasuryDirect describes the transfer and sale of marketable securities; the SEC’s bond overview explains the general risks of selling before maturity.
What risks do government bonds carry?
The risks depend on the issuer, security terms, and currency. The SEC identifies several risks that can apply to bonds:
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- Credit risk: The issuer may pay interest or principal late, or fail to pay.
- Interest-rate risk: Market prices can move when interest rates change, affecting what you may receive if you sell early.
- Inflation risk: Fixed payments may lose purchasing power as prices rise.
- Liquidity risk: You may have difficulty finding a buyer when you want to sell.
- Call risk: Some bonds can be repaid early under their terms, which can affect the investor’s expected income and timing.
The SEC describes U.S. Treasury securities as backed by the full faith and credit of the United States. That description applies to U.S. Treasuries; it should not be generalized to every national, municipal, or foreign-currency government bond (Investor.gov: Bonds). A person whose home currency differs from a bond’s denomination also faces exchange-rate exposure when measuring returns in that home currency.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How are government bonds taxed?
Tax treatment depends on the security and the investor’s jurisdiction. For U.S. Treasury securities, Investor.gov says income may be exempt from state and local taxes but is not exempt from federal taxes. TreasuryDirect specifically says interest on Treasury bonds is federally taxable and not subject to state or local income taxes (TreasuryDirect: Treasury bonds). Check the rules that apply where you live and for the specific bond; do not assume U.S. treatment applies elsewhere.
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What to compare before choosing between government bonds
“Government bond” alone does not tell you how an investment will behave. Compare the security’s issuer and jurisdiction, currency, maturity, coupon and payment schedule, purchase price and yield, inflation linkage, repayment source, ability to sell, applicable taxes, and any early-redemption or call terms. For a bond denominated in a currency other than the one you spend, include currency exposure in the comparison.
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