A government bond or sovereign bond is an instrument of indebtedness, issued by a national government to support government spending. It generally includes a commitment to pay periodic interest called coupon payments and to repay the face value on the maturity date.
For example, a bondholder invests $20,000 (called face value) into a 10-year government bond with a 10% annual coupon; the government would pay the bondholder 10% of the $20,000 each year. At the maturity date the government would give back the original $20,000.
Government bonds can be denominated in a foreign currency or the government's domestic currency. Countries with less stable economies tend to denominate their bonds in the currency of a country with a more stable economy. When governments with less stable economies issue bonds, there is a possibility they will be unable to make the interest payments and may default. All bonds carry a default risk. International credit rating agencies provide ratings for each country's bonds. Bondholders generally demand higher yields from riskier bonds. For instance, on May 24, 2016, 10-year government bonds issued by the Canadian government offered a yield of 1.34%, while 10-year government bonds issued by the Brazilian government offered a yield of 12.84%.If a government is close to default on its debt the media often refer to this as a sovereign debt crisis.