Are long-term U.S. government bonds risk-free?

By Investopedia Staff AAA
A:

For any debt obligation to be considered completely risk-free, investors must have full faith that the principal and interest will be paid in full and in a timely manner. The faith aspect of a debt obligation is measured by a country's credit rating. Much like an individual's credit rating is determined by his or her borrowing and repayment history, so too are governments' financial histories scrutinized. From time to time, governments will borrow funds from other countries and investors through loans and bonds. The servicing and repayment of these bonds are carefully measured by financial institutions for creditworthiness. Specifically, these financial institutions look at a government's lending and repayment history, the level of outstanding debt and the strength of its economy.

One of the most popular credit rating companies, Standard and Poor's, has given the U.S. government its highest possible rating: AAA. Because U.S. government bonds are backed by the U.S. government and the U.S. has the most powerful economy in the world, these bonds are widely considered to be risk-free. When you purchase this type of bond, the U.S. government is guaranteeing that the interest and principal will be paid according to the bond covenants. That is, they are guaranteeing that payments will be paid on time and in full.

Only a monumental downturn in the economy or, possibly, a very rare circumstance during a time of war would prevent the U.S. government from repaying its short- or long-term debts. However, even such events are unlikely to result in the U.S. government defaulting, since it has the ability to print additional money (monetary policy) or increase taxes (fiscal policy) if additional capital is needed.

(To learn more about federal bond issues, check out our article Basics of Federal Bond Issues.)

RELATED FAQS

  1. How long can I hold my HH/H Bonds and still earn interest?

    Take advantage of your bond investment and learn how long you can hold on to your Series H/HH Bonds and still earn interest ...
  2. How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return ...
  3. How do I sign up for a TreasuryDirect account?

    Invest in Treasury securities by dealing directly with the U.S. Department of the Treasury online, conveniently managing ...
  4. What are the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and ...
RELATED TERMS
  1. Losses and Loss-Adjustment Expense

    The portion of an insurance company’s reserves set aside for ...
  2. Nonstandard Auto Insurance

    Auto insurance offered to drivers considered to carry the most ...
  3. Disease Management Program

    Disease management programs can help control health care expenses ...
  4. Current Liquidity

    The total amount of cash and unaffiliated holdings compared to ...
  5. Insurance Loss Control

    Risk management practices designed to reduce the likelihood of ...
  6. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
Related Articles
  1. Top 5 Forex Risks Traders Should Consider
    Economics

    Top 5 Forex Risks Traders Should Consider

  2. How A Limited Government Affects A Country's ...
    Economics

    How A Limited Government Affects A Country's ...

  3. Funding Higher Education With An ISA
    Investing Basics

    Funding Higher Education With An ISA

  4. 7 Ways To Protect Against Credit Card ...
    Credit & Loans

    7 Ways To Protect Against Credit Card ...

  5. The Fear And Greed Cycle Lives On
    Markets

    The Fear And Greed Cycle Lives On

Trading Center