Question

Consider the statement "U.S. government bonds have been downgraded by the rating agencies in recent years due to an increased level of risk brought on by our growing federal debt burden. Therefore, there is no such thing as a "risk-free" rate of interest." What do you think?

Answer 1

There is no such thing as risk free rate of return because there is always a risk associated with the United States treasury bonds also because this debt is related to the government payment are also to be paid in the future and it is seen from the past and that United State government has been piling onto a high level of debt and at a certain point of time in the future those debt has to be redeemed and United States government is also will be at high risk so their bonds are also not risk free and risk free just the theoretical concept because various government in the past has defaulted on its bonds and they have extended the time period of redemption.

it can be said that the United States Government bonds have been downgraded by the rating agencies because there has been an increased level of risk due to rising Federal debt which is expanding the books of accounts of the central bank in order to to maintain the stability in the economy by rolling out excessive credit which cannot be sustainable in the long-term because the credit will ultimately have a maturity period and those repayments will be due in the future so United States Government will ultimately have to pay those debt securities, So, United states treasuries are also not hedged to all those risks so I think that there is no concept like risk free bonds and even the United States treasury bonds have been prone to these risks of redemption in the future.

so the given statement is correct because bonds are not debtfree and these are the reasons because the corporate bonds have also been downgraded.