Because the federal government can always print more money, U.S. government bonds are considered risk-free.

• A. True
• B. Sometimes
• C. Not sure
• D. False

Answer: (D)

The concept here is that “risk-free” is about default or credit risk, not about every kind of risk. U.S. government bonds are considered free of default risk—the government is widely trusted to meet its debt obligations. But they are not risk-free in all respects. If inflation rises, the fixed payments from a bond buy less in real terms, so the real return can be eroded. Long-term Treasuries are especially sensitive to inflation and interest-rate changes, and in extreme cases, inflation or loss of currency confidence can reduce bond prices significantly. So, although Treasury securities are seen as default-free, they are not truly risk-free overall. That’s why the statement is false.