Does the market perception of risk free apply to all aspects of the U.S. government securities...

Does the market perception of risk free apply to all aspects of the U.S. government securities as an investment? Explain.

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Expert Solution

Treasury securities are not risk-free securities. The risk of government refusing (or being unable) to pay is minimal. Bu the government can use the tool of inflation to reduce value of its obligations, and hence investors' value of bonds would be less than expected. Also, if investor's expectations regarding interest rates, inflation, & relative credit risk turn out to be wrong, value of bonds would be much different than expected at time of purchase.

Rate or reinvestment risk: Due to monetary policy or rate changes the amount finally one would get accumulated through reinvestnent of coupons might be lesser than expected. Even for zero coupon and coupon paying bonds, the price changes with change in rates. Hencr, this risk remains in Treasury securities.

Default risk: The risk of US government defaulting on its payments even though minimal is there. The market perception generally is for this risk.

Inflation risk: The risk of losing purchasing power of the investment is there for Treasury securities.

jeff jeffy answered 11 months ago

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