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 and I need text not picture please )

Answer 1

A long-term United States government bond is always absolutely safe. ... 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.

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 it's 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.

Numbered footnotes

Generally quoted from the source:

1. The daily effective federal funds rate (IRFEDD.IUSA) is a weighted average of rates on brokered trades.

2. Weekly figures are averages of seven calendar days ending on Wednesday of the current week; monthly figures include each calendar day in the month.

3. Annualized using a 360-day year or bank interest.

4. Commercial paper, finance paper placed directly, and banker's acceptances are stated on a discount basis.

5. Interest rates on commercial paper are interpolated from data on certain commercial paper trades settled by The Depository Trust Company. The trades represent sales of commercial paper by dealers or direct issuers to investors (that is, the offer side). The 1-, 2-, and 3-month rates are equivalent to the 30-, 60-, and 90-day dates reported on the Board's Commercial Paper web page.

6. Rates on CDs on the secondary market are an average of dealer bid rates on nationally traded certificates of deposit.

7. Bid rates for Eurodollar deposits are collected around 9:30 a.m. Eastern time.

8. The bank prime loan rate is the rate posted by a majority of top 25 (by assets in domestic offices) insured U.S.-chartered commercial banks. Prime is one of several base rates used by banks to price short-term business loans.

9. The discount window primary credit rate is charged for discounts made and advances extended under the Federal Reserve's primary credit discount window program, which became effective January 9, 2003. This rate replaces that for adjustment credit, which was discontinued after January 8, 2003. For further information, see this 2002 FRB press release. The rate reported is that for the Federal Reserve Bank of New York. Historical series for the rate on adjustment credit as well as the rate on primary credit are available at the H.15 page.

10. Treasury constant maturities - nominal. Yields on actively traded non-inflation-indexed issues adjusted to constant maturities. The 30-year Treasury constant maturity series was discontinued on February 18, 2002, and reintroduced on February 9, 2006. From February 18, 2002, to February 9, 2006, the U.S. Treasury published a factor for adjusting the daily nominal 20-year constant maturity in order to estimate a 30-year nominal rate. The historical adjustment factor can be found at the U.S. Treasury web site and more methodology is here.

11. Yields on Treasury inflation protected securities (TIPS) adjusted to constant maturities. Source: U.S. Treasury. Additional information on both nominal and inflation-indexed yields may be found at the U.S. Treasury web site.

12. U.S. government securities, long-term average. Based on the unweighted average bid yields for all TIPS with remaining terms to maturity of more than 10 years.

13. International Swaps and Derivatives Association (ISDA®) mid-market par swap rates. Rates are for a Fixed Rate Payer in return for receiving three month LIBOR, and are based on rates collected at 11:00 a.m. Eastern time by Garban Intercapital plc and published on Reuters Page ISDAFIX®1. ISDAFIX is a registered service mark of ISDA. Source: Reuters Limited.

14. For corporate bonds, Moody's Aaa rates. Through December 6, 2001, averages of utility and industrial bond rates. As of December 7, 2001, industrial bonds only.

15. Bond Buyer Index, general obligation, 20 years to maturity, mixed quality; Thursday quotations.

16. Contract interest rates on commitments for fixed-rate first mortgages. Source: FHLMC.