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Why are U.S. government securities viewed differently from state and local government securities in terms of...

Why are U.S. government securities viewed differently from state and local government securities in terms of default risk?

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Answer #1

U.S. government securities are viewed differently because U.S. government securities are backed by the full faith and credit of the U.S. government. The U.S. government has never defaulted or delayed payment on its bonds. This makes U.S. government securities virtually risk-free.

Although state and local governments are a part of the U.S. government, they are not exactly the federal government. The US is a union of states. States have considerable financial autonomy. Thus, securities issued by state and local governments are not backed by the full faith and credit of the U.S. government, but that particular state or local governmetn. Going by history, the default rate on state and local government securities has been extremely low, but not zero.

Therefore, U.S. government securities are viewed differently from state and local government securities in terms of default risk

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