When talking debt securities, there’s a few options for the investor. Some of those options are corporate and government debt, and those can further be divided into smaller categories, such as bills, notes, and bonds.
We’re going to be looking exclusively at U.S. government bonds here.
What is a government bond?
A government bond is issued by the specific government, and is backed by the “full faith and credit” of that government. In other words, the government pays you a stated interest rate semiannually, or twice a year, for each bond that you hold.
The bond itself is debt, meaning you are loaning the government money in return for their interest payments to you and, at the end of the maturity term, the government pays you back the face amount stated on the bond.
These U.S. government bonds are called Treasury bonds, because they’re managed by the U.S. Treasury.
Is there risk associated with Government Bonds?
Despite the U.S. government consistently pushing past its debt ceilings and issuing more debt to the U.S. citizens, the government maintains the highest credit rating available (AAA), because the government has a special power– printing an endless supply of money mixed with limitless potential taxing power– when it comes to paying off its debt.
If the U.S. government were to ever default on the interest payments due from the loans, its credit rating would be severely hurt and the faith of the American people in the government’s ability to repay debt in the future would likewise be hurt.
While it is unlikely for the U.S. government to default on its debt, it is always possible, just as has happened to other countries, noticeably during the worldwide recession of 2008, meaning there is still risk associated with any investment.
Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.