What Is A Government Bond?!

The government funds it expenditure (current, capital and welfare expenditure) with tax revenues but what if they run a fiscal deficit (where government expenditures exceed tax revenues)? How will they plug the gap? ;

Just like a household who needs to pay its bills, they borrow money in the event that they haven`t got enough income. The government does the same thing when they need money to fund their expenditure. ;

To do so, they will issue a piece of paper which outlines three things: 1) the loan amount (let`s say £10m), 2) the time period (let`s say 5 years), and an interest rate (let`s say 5%). Therefore, the government wants a loan from investors of £10m, they promise to pay it back after 5 years and every year they will pay investors 5% interest (which is £500,000). ;

That is a government bond. Sound familiar? It should! I sometimes refer to these as "I O U" contracts. The government promises to pay investors back with interest after a certain time period has lapsed, according to the details of the contract. ;

Also, these contracts are tradeable which means investors can sell their rights to the contract.

Hopefully this article lends to your understanding of government bonds and quantitative easing.