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Bonds: money you lendrisk 2 of 5: low, steady lending

Government bond

Rules, protection and tax below are for China.

What it is

A loan to a national government. You hand over the money, the government pays a fixed interest payment on set dates, and at maturity it repays the original sum. Rich-country governments almost never fail to pay, which makes their bonds the reference point for what a very safe return looks like.

The catch is the price in between. A bond can be sold to someone else before maturity, and its price moves in the opposite direction to interest rates: when new bonds pay more, old ones paying less are worth less. Hold to maturity and none of that matters; sell early and it does.

Most countries let ordinary people buy directly from the treasury, cheaply, and the same bonds sit inside many funds and pensions.

How it works

  1. The government issues a bond with a face value, a fixed annual interest rate called the coupon, and a maturity date.
  2. You buy it at issue or from another holder, then receive the coupon on schedule, usually twice a year.
  3. The market price moves daily with interest rates and confidence in the country, so the yield you lock in depends on the price you paid.
  4. At maturity you receive the face value, whatever the price did in between.

The honest pros and cons

For

  • Rich-country government bonds are the closest thing to a promise that exists in investing.
  • You know the income and the repayment date in advance if you hold to maturity.
  • They tend to hold or gain value when shares fall, which steadies a mixed portfolio.
  • Direct purchase from the treasury is usually free or nearly free.

Against

  • Rising interest rates push the price of existing bonds down, sometimes sharply for long maturities.
  • The return is modest and can lag inflation for years.
  • Bonds of weaker governments carry real default risk, and a high yield is the warning sign.
  • Income is usually taxed unless the bond sits in a tax-sheltered account.

Getting it in China

Savings bonds (储蓄国债) available

    Wherever you are

    1. Decide the horizon first and pick a maturity that matches it, so you are never forced to sell early.
    2. Compare the treasury's direct-purchase route with a bond fund; direct is cheaper and predictable, a fund is simpler and spreads maturities.
    3. Look at the yield to maturity, not the coupon, because that is what you actually earn at today's price.
    4. Buy, note the payment dates, and leave it alone.

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    Go deeper

    Also called

    gilts, treasuries, Tesouro Direto, JGBs, sovereign bonds

    Often confused with

    • Corporate bond: A loan to a company that pays interest; riskier than lending to a government because companies fail more often.
    • Term deposit: Money locked at a bank for a fixed period in exchange for a known interest rate.
    • Bond ETF: An exchange traded fund holding a basket of bonds.
    Government bond in China · wealth-coop