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

Bonds / Fixed Income
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1 week ago
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Simple question, but a very complex issue. Every investment has risk. Risk can be small or great. Risk can be from default, credit, interest rate, market, and other types, to name a few. Default for a long term bond (10-30 years) would occur if the US Government cannot pay its bills (default) and does not have the funds to pay the interest to the holders of the debt (you the "bond holder"). There is a perceived slim chance of the US government defaulting which is one major reason the U.S. has a high credit rating and considered relatively safe for repayment. This may be why many people consider U.S. government bond investment "risk free". Bonds are usually issued in increments of $1,000 (principle).

Interest rate risk is probably a more real concern now, in my opinion. A US government bond is a debt of the US. In essence, a promise to pay you the holder of the debt, interest, in exchange for the use of the funds until a certain date in time (maturity date) when the U.S. government will return $1,000 principle to you, the bondholder. What few people realize is the bond always has a value in the market, what it can be resold for any time during the bonds life, until it matures or is recalled by the U.S. government. So a correlation usually exists between the price the bond is worth in the market and current interest rates. If interest rates stay the same, then the bond price (principle) should basically stay the same (par) over the term (life10, 30 years) of the debt (bond). The interest rate the U.S. government pays you is fixed when issued by the U.S. government, until maturity. The markets (stock/ bond) may create volatility for the issue that will cause the price (principle) in the market to rise and fall during the life (term) of the bond. Also, lets say you bought a new 30 year treasury bond that promises to pay you 2.75% a year for 30 years and the interest rates rise in a few years to 3.5%. The result of the new markets interest rate for a new government 30 year bonds similar to yours, will cause your already issued bond principle to fall (price) so your principle and interest rate you receive equal the new market issues. 

The principle fluctuations usually level out as you get closer to the maturity date of the bond, but be aware if you choose to sell your bond before maturity you may experience a decline of principle (what you paid for the bond). The fluctuations of principle may be slight and you can calculate the movement, if you know how or ask a professional. If you hold your bond to maturity the U.S. Government will return $1,000 or par. So, is the bond risk free? Bonds are investments and all investments face risks and volatility of principle due to may possible factors. Hold a bond to maturity and all thing considered you should get (par) your $1,000 back. Sell during the life of the bond and there may be fluctuations in principle. Like all investments, risk is an integral part of the investment. I strongly suggest you research the different types of risks that may cause the decline or increase the principle or contact an advisor that can explain the pro's and con's of your investment. Invest with knowledge, so you know what your risks are and their effects on your principle (money). Bonds can be a very complex area and you need to do your due diligence.

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