When governments need money, beyond that which they raise in taxes, they borrow money by issuing bonds. These bonds are bought by banks, institutions, foreign governments or sometimes individuals.

Bonds work in the same way as depositing money in a bank, so by buying a bond, the bond pays guaranteed interest for its term. This is currently around 3.5% to 4.5% per annum.

The shortest period for a bond is around 4 weeks, the longest has just been issued by Google to UK pension funds and lasts for 100 years. The last company to issue 100 year bonds was Motorola in 1997, which pays interest at 5.22% and will be redeemable in 2097.

At the end of the period, you get your money returned to you. In the case of government bonds, that returned money is normally produced by issuing more bonds as the government has spent the money you invested. This differs for private companies, as the bonds they issue can be repaid from profit or by selling assets.

Bonds are known by many other terms:

“Money printing”

“Quantitative Easing” or

“Inflation”