A government bond is a loan you give to a government, and the government pays you back with interest

When you buy a government bond, you are lending money to a federal, state, or local government. The government promises to pay you back the full amount on a specific date, called the maturity date. Until then, the government pays you interest — usually twice a year — at a rate that was set when the bond was issued.

The simplest way to think about it: a bond is the opposite of a bank loan. When you borrow from a bank, you owe the bank money. When you buy a bond, the government owes you money. You hold a piece of paper (or more often, a digital record) that proves the debt exists and states exactly when and how much you will be paid.

Government bonds are considered very safe because governments have the power to collect taxes and print currency. A U.S. Treasury bond — issued by the federal government — is one of the safest investments in the world. State and local bonds are also safe, though slightly riskier than federal bonds because the government backing them is smaller.

Key Takeaways

  • A government bond is a debt instrument where you lend money to a government and receive interest payments until the bond matures.
  • The U.S. Treasury issues federal bonds in three main types: Treasury bills (under one year), Treasury notes (two to ten years), and Treasury bonds (20 to 30 years).
  • You can buy government bonds directly from the Treasury Department through TreasuryDirect, or through a bank or brokerage firm.
  • The longer you agree to lend money, the higher the interest rate the government usually offers you.
  • Government bonds pay interest on a fixed schedule, typically twice per year, and return your full principal on the maturity date.

The three main types of U.S. Treasury bonds

The federal government issues three types of bonds, each with a different time frame. The difference is how long you agree to lend the money before you get it back.

Treasury bills mature in less than one year — usually 4 weeks, 13 weeks, 26 weeks, or 52 weeks. You buy them at a discount (meaning you pay less than the face value) and receive the full face value when they mature. The difference between what you paid and what you receive is your interest.

Treasury notes mature in 2, 3, 5, 7, or 10 years. You receive interest payments twice a year, and when the note matures, you get your full principal back. These are the most commonly held Treasury bonds.

Treasury bonds are the longest-term option, maturing in 20 or 30 years. Like notes, they pay interest twice a year. Because you are lending money for such a long time, the government offers a higher interest rate to compensate you for that risk.

How interest payments work on government bonds

When you own a Treasury note or bond, you receive interest payments on a schedule set when the bond was issued. Most bonds pay interest twice a year, on specific dates. The interest rate — called the coupon rate — does not change over the life of the bond, even if interest rates in the broader economy rise or fall.

For example, if you buy a 10-year Treasury note with a 4 percent coupon rate and a $10,000 face value, you will receive $200 twice a year ($10,000 × 4% ÷ 2) for ten years. On the maturity date, you receive your final interest payment plus the full $10,000 principal.

Treasury bills work differently because they do not pay interest during the holding period. Instead, you buy them at a lower price than their face value. When the bill matures, you receive the full face value. The difference is your earnings.

Where to buy government bonds

You can purchase U.S. Treasury bonds directly from the federal government through TreasuryDirect, which is the official online platform run by the Bureau of the Fiscal Service. TreasuryDirect charges no fees and has no account minimums, though the minimum purchase is $100 for most bonds.

You can also buy Treasury bonds through a bank, credit union, or brokerage firm. These institutions charge a fee for the transaction, but they may offer more flexibility in how you buy and sell. If you want to sell a bond before it matures, a brokerage is usually the easiest route.

State and local government bonds are typically bought through a brokerage or financial advisor, not directly from the government. These bonds are less standardized than Treasury bonds and require more research into the specific government's financial health.

What happens if you sell a bond before it matures

You do not have to hold a government bond until maturity. You can sell it on the secondary market — meaning you sell it to another investor — at any time. However, the price you receive depends on current interest rates and how much time remains until maturity.

If interest rates have risen since you bought the bond, the bond will be worth less because new bonds are being issued at higher rates. If interest rates have fallen, your bond will be worth more. This is the main risk of owning bonds: if you need to sell before maturity and rates have risen, you will receive less than you paid.

If you hold the bond until maturity, you always receive the full face value regardless of what has happened to interest rates. This is why bonds are considered safer than stocks — the outcome is predictable if you can wait.

Why people buy government bonds

Government bonds serve different purposes depending on your situation. Some people buy them for steady income: the interest payments arrive on schedule and are predictable. Others buy them as a safe place to store money they do not want to risk in stocks. Still others buy longer-term bonds when they expect interest rates to fall, betting that the bond's value will rise.

Treasury bonds are also used by banks, insurance companies, and pension funds as a way to meet future obligations. Because the payment is may provide, these institutions can count on the money arriving on time.

The trade-off is that government bonds pay less interest than riskier investments like corporate bonds or stocks. You are paying for safety with lower returns. How much safety you want determines which type of bond makes sense for you.

How government bonds affect the broader economy

When the federal government issues bonds, it is borrowing money from investors to pay for spending that exceeds tax revenue. The interest rate on Treasury bonds influences interest rates throughout the economy — when Treasury rates rise, banks typically raise the rates they charge on mortgages and car loans.

The Federal Reserve also uses Treasury bonds as a tool to manage the economy. When the Fed wants to lower interest rates, it buys Treasury bonds, which increases demand and lowers rates. When it wants to raise rates, it sells bonds, which decreases demand and raises rates.

This means the interest rate you receive on a Treasury bond is not set by the Treasury Department alone — it is set by the market, based on supply and demand from millions of investors and institutions worldwide.

Frequently Asked Questions

Can I lose money on a government bond?

If you hold the bond until maturity, you will receive the full face value, so you cannot lose principal. However, if you sell before maturity and interest rates have risen, you will receive less than you paid. You can also lose purchasing power if inflation rises faster than the bond's interest rate, meaning your money buys less when you get it back.

Are Treasury bonds taxed?

Interest from Treasury bonds is subject to federal income tax but is exempt from state and local income taxes. This is one advantage of Treasury bonds over other investments. You report the interest on your federal tax return each year, even if you have not received the payment yet.

What is the difference between a Treasury bond and a savings bond?

Treasury bonds are traded on the secondary market and can be bought and sold before maturity. Savings bonds (Series I and Series EE) are issued directly to individuals and cannot be sold to other people — you can only cash them in with the government. Savings bonds also have different interest rate structures and holding periods.

How do I know what interest rate I will receive?

The interest rate is determined at auction. The Treasury holds regular auctions for each type of bond, and investors bid on the rate they are willing to accept. The rate that clears the auction — meaning enough investors bid to purchase all the bonds offered — becomes the coupon rate for that bond. You can see upcoming auction dates and results on the TreasuryDirect website.

Can I buy government bonds for someone else?

Yes. You can purchase Treasury bonds in someone else's name or as a gift. If you buy through TreasuryDirect, you can set up an account and designate a beneficiary. If you buy through a brokerage, the account can be registered in any name you choose, subject to the brokerage's rules.