What type of risk is associated with government securities?

Government securities, while often considered a safer investment compared to corporate bonds, are not devoid of risk. They are associated with both credit risk and market risk, which makes the choice of "both credit and market risk" the correct answer.

Credit risk refers to the possibility that the issuer of the security may default and fail to meet its debt obligations. While government securities, particularly those issued by stable governments, are typically regarded as low risk in terms of default, circumstances such as political instability or economic downturns can impact even government entities. It is important to recognize that higher-risk situations can arise, especially in countries with less stable financial systems.

Market risk, on the other hand, pertains to the fluctuations in the price of the securities due to changes in market conditions. Interest rates are a significant factor; as rates rise, the prices of existing government bonds usually fall. This is a common scenario that affects all fixed-income investments, making market risk an inherent factor for government securities.

Thus, understanding that government securities expose investors to both credit and market risks allows for a more comprehensive assessment of their investment strategy.