FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Full Faith And Credit Clause

Updated on May 13, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

Full Faith And Credit Clause Definition

The Full Faith and Credit Clause refers to the backing of interest plus the principle of one entity by the total commitment and guarantees to another entity. Thus, many entities use it to back their debt in an unsecured manner, using their entire brand and trust. Moreover, government bonds are issued by the United States government based on their power to collect revenues and taxes in the future.

Full Faith And Credit Clause

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Full Faith And Credit Clause (wallstreetmojo.com)

Bonds under this clause have low yields as they are the least risky with the government’s unlimited lawful revenue capacity. Also, the famous Government National Mortgage Association, or Ginnie Mae, represents the best example of a government institution that has the US government’s full faith and credit backs.

Key Takeaways

  • The term full faith and credit clause describes the unconditional commitment and assurance of one entity to the interest and principal of another company.
  • Organizations frequently use it to guarantee and fully trust their unsecured debt. Also, the US government issues bonds depending on its capacity to generate future income and taxes.
  • The clause aims to provide risk-free investment options for investors and lenders, such as government-backed Treasury securities that remain secure in economic downturns.

Full Faith And Credit Clause Explained       

The full faith and credit clause of the United States government is responsible for making the payments on any guarantees issued in accordance with this clause. Thus, the secretary’s guarantees are binding and conclusive evidence of financial suitability for related commitments without dispute over legitimacy.

It is enshrined and conferred to the government through 42 USC 5308: guarantee and commitment to guarantee loans for acquisition of property under Title 42-the public health and welfare chapter 69-community development under this clause in the constitution having laws effective since 22nd March 2023. As a result, the US government pledges to cover Treasury-issued bills, bonds, or notes with borrowed funds and government credit.

The issuers of bills, bonds, and notes guarantee timely interest payments to their holders at regular intervals. Moreover, upon maturity, investors and lenders expect full payment of the securities‘ face value. As a result, these factors motivate investors to purchase debt for consistent interest payments and full repayment, regardless of the US economy.

Purpose

The full faith and credit clause’s importance and purpose are as follows:

  • To allow risk-free investment opportunities for investors and lenders.
  • To provide government-backed Treasury bonds, bills, or notes to investors that do not fail in economic crisis.
  • It provides capital preservation.
  • It provides a certain amount of interest income to the investors.
  • The government can raise funds by issuing bills, notes, and bonds, leveraging its ability to repay lenders and print currency.
  • A small government can raise funds through GO municipal (muni) bonds backed by the municipality’s full faith and credit. As a result, during the 2009 crisis, the US government supported municipalities by backing their Muni bonds with full faith and credit through newly issued Build America Bonds (BABs).
  • The US government fully backs the debt obligations of agencies like the Government National Mortgage Association (Ginnie Mae).

Examples

Let us understand the topic using a few examples.

Example #1

Government-issued bonds provide special tax benefits to the buyer. Thus, it also ensures that the income received in the form of interest is earned from savings and Treasury bonds. As a result, the US government guarantees these bonds with its full faith and credit.

Example #2

Another example is the government-sponsored companies in the US, including Fannie Mae and Ginnie Mae. Although they don’t issue debt directly, they do guarantee some of the securities backed by mortgages they purchase. This implicit guarantee, supported by full faith and credit from the government, draws investors and maintains lower mortgage rates.

Frequently Asked Questions (FAQs)

Where is the full faith and credit clause?

One can find such laws in section one under Article Four of the American Constitution, conferred upon every state to records, judicial proceedings, and the public records of every other state. Furthermore, acts, proceedings, and records can be proven, and Congress determines their consequences by prescribing general laws.

How does the full faith and credit clause affect individuals?

It means that courts in every state must accept and honor every other state’s judgments, regulations, and laws. Other states will accept and honor the marriages of individuals who get married under the law of a particular state in accordance with the full faith and credit principle.

How does the full faith and credit clause help you?

The clause proves to be quite valuable for every citizen of America as it instructs courts of every state to accept and uphold other states’ judgments regarding:

• Birth certificates
• Child custody and visitation
• Marriage issues like interracial marriages, domestic partnerships, civil unions, etc.
• Child support determinations
• Protection orders

This article has been a guide to Full Faith and Credit Clause and its definition. Here, we explain the concept in detail along with its examples and purpose. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *