Question

Explain whether the following statement is correct, and if not why?A long term US government bond is always absolutely safe. ( I want 500 word with refrencess and I need text not picture please )

Answer 1

solution:

A long-term United States government bond is always absolutely safe only the money is guaranteed to be there. However, there are many mitigating facts may render the bond as not being as valuable as initially thought. As interest change, the prices of bond fluctuate. Furthermore, inflation can have a large how well a government bond may perform over a period of time. References Brealey, R., Myers, S., & Allen, F. (201Principles of Corporate Finance, Consider Edition (2nd Ed.) Boston McGraw returns.

                     According to Brealey, Myers, and Allen (2011), a long-term United States government bond is not always an absolutely safe investment, especially when compared to Treasury bills which can offer relatively stable prices due to their short maturity. The price of the long-term bond is not necessarily safe as the price fluctuates often due to changes in interest rates. Although government bond prices can fluctuate with inflation, the nominal return of these investments is risk-free for investors who invest until maturity so long as inflation is not considered. And also, the payments are all in nominal dollars so inflation risk must also be considered.

                                   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 second highest possible rating: AA+. 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.