Government bond
Governments issue bonds to raise finance, and investors receive the contractual payments subject to the security's terms. Market price changes with required yields and may also reflect sovereign credit, currency, inflation and liquidity risk. A particular government bond yield can serve as a model proxy for a risk-free rate when its currency and horizon suit the analysis, but no government security is automatically free of every risk. Distinguish longer-maturity bonds from short-dated treasury bills and check coupon and redemption terms.
Worked example
An investor buys a government bond paying fixed coupons for ten years. If comparable yields rise, its market price generally falls; the investor may receive less than purchase price if selling before maturity even though the coupon is unchanged.
Common mistake
Assuming a government bond's fixed coupon makes its market price fixed or eliminates inflation, currency and sovereign credit risks.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |