A bond is a ‘promissory note’, issued by and backed by an organisation, which promises to pay a set amount (the face value) on a certain date as well as regular interest payments over the life of the bond. This type of investment is known as a debt investment, essentially it’s a loan, you’re the lender.
Government bonds – Gilts
The Venetians were the first to issue government securities, a form of bond but the first modern version of a Government bond was issued by the British government 1693 to raise money to fund a war against France. Government bonds are loans, like any other bond but are regarded as the safest type of investment you can make as the governments are a lot less likely than other organisations to default on payments.
Originally, UK loan certificates were printed on gold-edged paper, hence they became known as gilt-edged securities, and now just ‘gilts’.
The interest rate is usually referred to as the ‘yield’ on the bond, and it is directly linked to how likely it is that the borrower – say, the British Government or the Greek Government, or you may remember Argentina – will default.
Most Government bonds are issued in the currency of that government but not exclusively. Bonds issued in foreign currencies are called Sovereign bonds