Foundations

The United States (U.S.) government is the largest securities issuer in the world and currently maintains a debt level of over $33 trillion. A significant amount of money is borrowed to finance federal expenditures, which include the military and social programs (e.g., Medicare, Medicaid, SNAP).

U.S. government debt is the most actively traded security in the world. Unlike municipal bonds, federal debt maintains virtually no liquidity risk. If you want to sell your U.S. government bond, rest assured another investor is willing to buy it.

A common theme throughout all U.S. government debt is its lack of default risk. Issuers that default cannot make required interest or principal payments, typically due to bankruptcy. The federal government is a powerful institution that can create its own currency (through the Federal Reserve), which is demanded worldwide. Because of the safety related to these securities, U.S. government debt is generally considered to be rated AAA* (the highest bond rating).

*In 2011, Standard & Poor’s (S&P) downgraded US government debt from AAA to AA+. In 2023, Fitch downgraded US government debt from AAA to AA+. Both organizations cited rising debt levels, political strife, and issues with the U.S. debt ceiling. Moody also downgraded it slightly to Aa1 in 2025, but regardless, you should assume U.S. Government securities maintain a AAA rating for exam purposes.

U.S. government debt is issued with the full and direct backing of the federal government, considered the “gold standard.” Although national debt levels are rising today, you should assume that default risk is not a factor for test purposes. As stated above and discussed later in this unit, the U.S. government maintains the power to create more U.S. dollars, so it theoretically cannot run out of money (although politics can certainly get in the way).

While a lack of default risk applies to all U.S. Government debt, the different forms of federal debt are unique and involve various risks and benefits. In the following chapters, we’ll discuss their characteristics. Let’s dive in!