Government Bond

What are government bonds? We’re going to narrow this question a bit and declare these bonds to be U.S. Government bonds.

Our answer would be a tad different if we were discussing bonds backed by North Korea, Nigeria, or Egypt.

U.S. Government bonds come in a few flavors. Generally speaking, they range in duration. Short-term US government paper refers to things that come due in a year or less. Then there are Treasury Bills, which come in a variety of durations. When you buy a bond, it has a face amount of, say, $1,000 for what is called its par value. That piece of paper might agree that Clown Shoes Incorporated (which is where most congressmen get their footwear, of course) will pay $30 twice a year to the holder for 10 years, and then pay back the original $1,000 invested.

The interest rate here is 6% per year. But many U.S. Government notes are sold at auction, which means they sell at a discount to their par value. Regardless of how they're sold, U.S. Government bonds are backed by what is generally perceived as the most certain or secure financial backer in the world, even more powerful than Google.

The bonds are backed specifically by the U.S. Government’s right to tax its citizens. So now you can stop wondering about that bottomless hole that a third of every paycheck vanishes into.