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.
Bonds, in general, have multiple risks, but in this case we will explore the two main risks. Default risk and Interest Rate Risk.
Generally speaking, US government bonds are considered risk free, however that is simply looking at Default Risk. Therefore, when US government bonds are referred to as risk free, it should technically say Default risk free. (This may change one day but as of now this remains true).
However bonds do fluctuate in price and that can be attributed to (amongst other things) interest rates. Typically bond prices have an inverse relationship to Interest rates. If Interest rates increase, the price of a bond decreases.
In summary, if you are holding the US government bond to maturity, essentially it is considered risk free, however, if you decide to sell the bond before maturity the price could be lower (or higher) than the price you purchased the bond.
Historically, US government bonds have been considered "risk free" because the US government has never defaulted on its bonds.
However, that only addresses one dimension of risk, which is the risk of default.
When you purchase a bond, it's price will fluctuate based on a number of factors including interest rates. When interest rates rise, the price of the bond falls. When interest falls, the price of the bond rises. Hence, should you need to trade your bond, you could book a profit or a loss depending on what's happening in the market. That is true for US government bonds as well as any other bond.
Back to default risk. Even though the US has never defaulted on its bonds, its credit rating was reduced by Standard & Poors on August 5, 2011, indicating that there was a slightly higher risk of default as a result of Capital Hill politics. The rating has since been restored to AAA. It serves, however, to highlight the fact that even the bonds of the mightiest economy in the world could still be subject to default risk.
In summary, the traditional view that US government bonds are risk-free only addresses the risk of default. On that measure, most people consider the US to be (pretty) safe.
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.)
The short answer is that the face value (not necessarily the purchase price) of US government bonds is risk free provided they are held as individual bonds (not a bond fund) and they are held until maturity. If you buy a US government bond at a premium to face value (can easily happen in this environment), the additional price above face value is not risk-free and will in fact dissipate over time. Be certain to ask your broker before buying to ensure you know what you are getting. Check the definitions of premium and discount bonds to get more information on this important concept.