Opportunity to buy Illinois bonds that can never default?
"Can't declare bankruptcy isn't the same as ""can't default"".  Bankruptcy is a specific legal process for discharging or restructuring debts.  If Illinois can't declare bankruptcy, that means it will still owe you the money for the bonds no matter what, but it doesn't guarantee that it will actually pay you what it owes. If Illinois should run out of money to pay what's due on its bonds, then it will default.  Unlike the federal government, Illinois can't print money to make the payments." "If Illinois cannot go bankruptcy This is missing a few, very important words, ""...under current law.""   The United States changed the law so as to allow Puerto Rico to go into a form of bankruptcy.  So you cannot rely on a lack of legal support for bankruptcy to protect any bond investments you might make in Illinois.  It is entirely possible for the federal government to add a law enabling a state to discharge its debts through a bankruptcy process.  That's why the bonds have been downgraded.  They are still fine now, but that could change at any time.   I don't want to dive too deep into the politics on this stack, but I could quite easily see a bargain between US President Donald Trump and Democrats in Congress where he agreed to special privileges for pension debts owed to former employees in exchange for full discharge of all other debts.  That would lead to a complete loss of value for the bonds that you are considering.  There still seem to be other options now, but they seem to be getting closer and closer to that." If you give money to a person or entity, and they don't have the ability to pay you back, it doesn't matter if they are legally required to pay you. "Sovereign immunity is the state's ultimate ""get out of bankruptcy free"" card.  After all, the state has a hand in defining what bankruptcy even is in their state.  Federal law is a framework, states customize it from there.   The state's simplest tactic is to simply not pay you.  And leave you scrambling to the courthouse for redress. Is that an automatic win?  Not really, the State can plead sovereign immunity, e.g. Hans v. Louisiana, Alden v. Maine.     You could try to pierce that sovereign immunity, essentially you'd be in Federal court trying to force the state into bankruptcy.  This would pit State authority against Federal authority.  The Feds are just as likely to come in on the state's side, and you lose.  Best scenario, it's a knock-down drag-out all the way to the Supreme Court.  You would have to be one heck of a creditor for the legal fees to be worth your trouble.  States don't make a habit of this because if they did, no one would lend money to them, and this would be rather bad for the economy all around.  So business and government work really hard to avert it.  But it always stands as their ""nuclear option"".  And you gotta know that when loaning money to States."
I looked into the investopedia one (all their videos are mazing), but that detail just was not clear to me, it also makes be wonder, if a country issues bonds to finance itself, what happens at maturity when literally millions of them  need to be paid? The income needs to have grown to that level or it defaults? Wouldn't all the countries default if that was the case, or are bonds being issued to being able to pay maturity of older bonds already?  (I'm freaking myself out by realizing this) Russia has become more risky as an investment, thus investors, basically the market, wants to be paid more for investing in or owning those bonds. As yields go up, prices go down. So right now you can buy a low priced Russian bond with a high yield because the market views the risk involved as higher than risks involved in other similar securities. As no one has mentioned them I will...  The US  Treasury issues at least two forms of bonds that tend to always pay some interest even when prevailing rates are zero or negative.  The two that I know of are TIPS and I series bonds. Below are links to the descriptions of these bonds: http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm "This is the best tl;dr I could make, [original](https://www.bloomberg.com/news/articles/2017-05-25/investors-say-it-s-time-to-price-climate-into-cities-bond-risks) reduced by 95%. (I'm a bot) ***** &gt; Municipal defaults are rare: Moody&amp;#039;s reports fewer than 100 defaults by municipal borrowers it rated between 1970 and 2014.  &gt; Kurt Forsgren, a managing director at S&amp;P, said its municipal ratings remain &amp;quot;Largely driven by financial performance.&amp;quot; He said the company was looking for ways to account for climate change in ratings, including through a city&amp;#039;s ability to access insurance.  &gt; Laskey, of Fitch, was skeptical that rating companies could or should account for climate risk in municipal ratings.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6ejcgp/rising_seas_may_wipe_out_these_jersey_towns_but/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~133538 tl;drs so far."") | [Theory](http://np.reddit.com/r/autotldr/comments/31bfht/theory_autotldr_concept/) | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **rated**^#1 **climate**^#2 **risk**^#3 **bond**^#4 **change**^#5" "Looking at the list of bonds you listed, many of them are long dated. In short, in a rate rising environment (it's not like rates can go much lower in the foreseeable future), these bond prices will drop in general in addition to any company specific events occurred to these names, so be prepared for some paper losses.  Just because a bond is rated highly by credit agencies like S&P or Moody's does not automatically mean their prices do not fluctuate. Yes, there is always a demand for highly rated bonds from pension funds, mutual funds, etc. because of their investment mandates. But I would suggest looking beyond credit ratings and yield, and look further into whether these bonds are secured/unsecured and if secured, by what. Keep in mind in recent financial crisis, prices of those CDOs/CLOs ended up plunging even though they were given AAA ratings by rating agencies because some were backed by housing properties that were over-valued and loans made to borrowers having difficulties to make repayments. Hence, these type of ""bonds"" have greater default risks and traded at huge discounts. Most of them are also callable, so you may not enjoy the seemingly high yield till their maturity date. Like others mentioned, buying bonds outright is usually a big ticket item. I would also suggest reviewing your cash liquidity and opportunity cost as oppose to investing in other asset classes and instruments." US or EU states are sovereigns which cannot go bankrupt. US states have defaulted in the 1840's, but in most of those cases creditors were eventually repaid in full. (I'm not 100% sure, but I believe that Indiana was an exception with regard to costs incurred building a canal system) The best modern example of a true near-default was New York City in the late 1970's. Although New York City isn't a state, the size and scope of its finances is greater than many US states. What happened then in a nutshell: Basically, a default of a major state or a city like NYC where creditors took major losses would rock the financial markets and make it difficult for all states to obtain both short and long term financing at reasonable rates. That's why these entities get bailed out -- if Greece or California really collapse, it will likely create a domino effect that will have wide reaching effects. "All bonds carry a risk of default, which means that it's possible that you can lose your principal investment in addition to potentially not getting the interest payments that you expect.  Bonds (in the US anyway) are graded, so you can manage this risk somewhat by taking higher quality bonds, i.e. in companies or governments that are considered more creditworthy. Regular bank savings (again specific to the US) are insured by FDIC, so even if your bank goes bust, the US Government is backing them up to some limit.  That makes such accounts less risky.  There's generally no insurance on a bond, even if it is issued by a government entity. If you do your homework on the bond rating system and choose bonds in a rating band where you're comfortable, this could be a good option for you.  You'll find, however, that the bond market also ""knows"" that the interest rates are generally low, so be ware that higher interest issues are usually coming from less creditworthy (and therefore more risky) issuers. EDIT Here's some additional information based on the follow-up question in the comment.  When you buy a bond you are actually making a loan to the issuer.  They will pay you interest over the lifetime of the bond and then return your principal at the end of the term. (Verify this payment schedule - This is typical, but you should be sure that whatever you're buying works like this.)  This is not an investment in the value of the issuer itself like you would be making if you bought stock. With stock you are taking an ownership share in the company. This might entitle you to dividends if the company pays them, but otherwise your investment value on a stock will be tied to the performance of the company.  With the bond, the company might be in decline but the bond still a good investment so long as the company doesn't decline so much that they cannot pay their debts. Also, bonds can be issued by governments, but governments do not sell stock. (An ""ownership share of the government"" would not make sense.) This may be the so-called sovereign debt if issued by a sovereign government or it may be local (we call it municipal here in the US) debt issued by a subordinate level of government.  Bonds are a little bit like stock in the sense that there's a secondary market for them.  That means that if you get partway through the length of the bond and don't want to hold it, you can sell the bond to someone else.  Of course, it will be harder to sell a bond later if the company becomes insolvent or if the interest rates go up between when you buy and when you sell.  Depending on these market factors, you might end up with a capital gain or capital loss (meaning you get more or less than the principal that you put into the bond) at the time of a sale." Risk is reduced but isn't zero The default risk is still there, the issuer can go bankrupt, and you can still loose all or some of your money if restructuring happens. If the bond has a callable option, the issuer can retire them  if conditions are favourable for the issuer, you can still loose some of your investment. Callable schedule should be in the bond issuer's prospectus while issuing the bond. If the issuer is in a different country, that brings along a lot of headaches of recovering your money if something goes bad i.e. forex rates can go up and down. YTM, when the bond was bought was greater than risk free rate(govt deposit rates) Has to be greater than the risk free rate, because of the extra risk you are taking. Reinvestment risk is less because of the short term involved(I am assuming 2-3 years at max), but you should also look at the coupon rate of your bond, if it isn't a zero-coupon bond, and how you invest that. would it be ideal to hold the bond till maturity irrespective of price change It always depends on the current conditions. You cannot be sure that everything is fine, so it pays to be vigilant. Check the health of the issuer, any adverse circumstances, and the overall economy as a whole. As you intend to hold till maturity you should be more concerned about the serviceability of the bond by the issuer on maturity and till then. The Barclay's 20+ Year Treasury Bond inception date was July 21, 2002. You aren't going to find treasury bond information going back to 1900 because Treasury Bills have only been issued since 1929. The U.S. Department of the Treasury will give you data back to 1990. There's a good article in the Globe and Mail which covers why you may want to buy bonds as part of your portfolio. The key is diversification. Historically, stocks have done better than bonds long-term, but when stocks fall, bonds tend to (though do not always) go up. If you are investing for 30 years, the risk of putting money into bonds is that you will not make as much money as if you had put the money into stocks. Historically (in the US or Canada), you'd have seen positive returns, just not as high as investing in the stock market. There are many investment strategies. I live in Canada and personally favour the one described in the Canadian Couch Potato, a passive index investment strategy where I invest my money in Canadian, U.S. and International equity (stock market mutual funds) and also in a Canadian bond fund. There are, of course, plenty of people who will tell you to take a radically different strategy with your investments. "All of the other answers here are accurate, but (I think) are missing the point as to the question, which rests on how Bonds work in the first place. The bond specifies a payback AMOUNT and DATE. Let's say it is $10,000 and one year from today. If you buy that today for $9900, your yield will be 1%. If you buy it today for $11,000, your yield will be less than 0% (please don't make me do the math - it's just under negative 1%). You might be willing to pay that 1% (rather than receive 1%) for the certainty that you will definitely get your money back. The combined actions of all the people who may be willing to pay a little more or a little less for the safety of a US Treasury Bond is what people call ""the Market.""  Market forces (generally, investor confidence) will drive the price up and down, which affects the yield. All the other stuff - coupons and inflation and whatnot - all of that only makes sense if you understand that you aren't buying a rate of return, you are buying a payback amount and date." Bonds can increase in price, if the demand is high and offer solid yield if the demand is low.  For instance, Russian bond prices a year ago contracted big in price (ie: fell), but were paying 18% and made a solid buy.  Now that the demand has risen, the price is up with the yield for those early investors the same, though newer investors are receiving less yield (about 9ish percent) and paying higher prices.   I've rarely seen banks pay more variable interest than short term treasuries and the same holds true for long term CDs and long term treasuries.  This isn't to say it's impossible, just rare.  Also variable is different than a set term; if you buy a 10 year treasury at 18%, that means you get 18% for 10 years, even if interest rates fall four years later.   Think about the people buying 30 year US treasuries during 1980-1985.  Yowza. So if you have a very large amount of money you will store it in bonds as its much less likely that the US treasury will go bankrupt than your bank. Less likely?  I don't know about your bank, but my bank doesn't owe $19 trillion. No, there isn't. There are a number of reasons that institutions buy these bonds but as an individual you're likely better off in a low-yield cash account. By contrast, there would be a reason to hold a low-yield (non-zero) bond rather than an alternative low-yield product. "A (very) simplified bond-pricing equation goes thus: Fair_Price: {Face_Value * (1 + Interest - Expected_Market_Return) ^ (Years_To_Maturity)} * P(Company_Will_Default_Before_Maturity) To reiterate, that is a very simplified model. But it allows us to demonstrate the 3 key factors that drive ""Fair"" Value: The interest relative to the current market rate. If your AAA bond yields 1%, but an equally-good AAA bond currently sells at 3% in the market, then the ""Equivalent"" value is the face value minus 2% (1% - 3%) for every year to maturity.  Years to maturity. Because 1) is multiplied for every year to maturity, longer-dated bonds are more sensitive to changes in market rates. If your bond yields 2% less than market but matures in a year, then it's worth $98, but if it matures in 56 years, then it's only worth 0.98^56 = $32. Conversely, if your bond yields more than the market rate, then its' price will be greater than face value. The company might default on the debt. If a Bond has a ""Fair"" Value of $100, but you think there's a 50% chance that the company will default, then it's only worth $50. In fact, it can be worth even less because getting paid on a defaulted bond can often take time and/or money and/or lawyers. In your case, because your bond matures in 56 years but yields ~5% (well above the current market rate), for it to be below Face value implies a strong probability of default, or a strong belief that market returns will be above 5% over the next 56 years." Usually Bonds are used to raised capital when a lender doesn't want to take on sole risk of lending. If you are looking at raising anything below 10m bonds are not a option because the bank will just extend you a line of credit. You're talking about floating rate loans. It's so that the bond is marked back to market every 90 days. Any more often would be a hassle to deal with for everyone involved, any less often and they would be significant variance from LIBOR vs. the loan's specific rate.