Question

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

Answer 1

Why US Government Bonds Are Considered Safe

There are two kinds of risk in the bond market: credit risk and interest rate risk. Credit risk is the risk that an issuer will default, while interest rate risk accounts for the impact of changes in prevailing rates. Treasuries are risk-free is in the first instance: credit risk. Despite concerns about the United States’ fiscal health, U.S. government bonds are seen as being among the world’s safest in terms of the likelihood that their interest and principal being paid on time. The United States has never defaulted on its debt in the modern era, although there were some cases of restructuring in the 1800s.

U.S. Government Bonds are nearly as close to risk-free as an investment can get. This low-risk profile is because the issuing government backs the bonds. Government bonds from the U.S. Treasury are some of the most secure worldwide, while those floated by other countries may carry a greater degree of risk.

Due to this nearly risk-free nature, market participants and analyst use Treasuries as a benchmark in comparing the risk associated with securities. The 10-year Treasury bond is also used as a benchmark and guide for interest rates on lending products. Due to their low risk, U.S. Treasuries tend to offer lower rates of return relative to equities and corporate bonds.

A Long term United States government is safe but has some risk attached to it. This is because; the bond price fluctuations are based on interest rate fluctuations. Also bond payments are in nominal dollars. The risk attached to long-term United States government Bond is inflation Risk (in one angle).

Other Perspective

For any debt obligation to be considered absolutely safe, 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.