http://www.businesshalacha.com/articles/bond-israelRabbi Tzedek took the mike and explained: "The Torah prohibits taking interest from the borrower. However, R' Moshe Feinstein zt"l ruled that there is no violation of ribbis when lending to a corporation, even if Jewish owned, since the Jewish owners do not carry a personal lien and the payment liability is limited to the corporate assets. (Igros Moshe Y.D.II: 63) This would apply also when lending to the government of Israel.
Other authorities dispute R. Moshe's leniency, since they view the corporation simply as a partnership of the various Jewish owners, who are considered the borrowers. Despite this, Rav Zvi Pesach Frank zt"l suggests that it might be permissible to take interest from a Jewish government, since there are no defined owners to identify as the borrowers. (Har Zvi Y.D. 126)
Most importantly, though, the government of the State of Israel subjects the bonds to a heter Iska. Heter iska, which requires a separate discussion, is a profit-sharing partnership agreement that is generally accepted to allow transactions that might otherwise entail ribbis. Although some authorities question the widespread usage of heter iska, one can rely on it for Israel Bonds in conjunction with the other reasons we mentioned." (Bris Yehuda 7:n66)
