Government bond

A government bond is a loan an investor makes to a national government, in exchange for regular interest payments and the return of the original amount at a set maturity date. Governments issue them to fund spending, and they are widely treated as one of the safest investments available, since a stable government defaulting on its own debt is rare.

Because they are considered so safe, a government bond's yield, the return it pays an investor, is often used as a reference point for a nearly risk-free return. In a valuation model, that yield is the starting point, the risk free rate, that a company's discount rate is built up from. Investors add an equity risk premium on top for the extra risk of holding a stock, so even a stable, predictable company's discount rate sits well above what a safe government bond yields.