Question

In: Finance

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.

Solutions

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.


Related Solutions

Which of the following risk premiums apply to both corporate securities and federal government securities? a.Default...
Which of the following risk premiums apply to both corporate securities and federal government securities? a.Default risk only b.Liquidity risk only c.Maturity risk only d.Both default risk and liquidity risk e.Both liquidity risk and maturity risk
7) There are only two securities (A and B, no risk free asset) in the market....
7) There are only two securities (A and B, no risk free asset) in the market. Expected returns and standard deviations are as follows: Security Expected return standard Deviation Stock A 25% 20% Stock B 15% 25% The correlation between stocks A and B is 0.8. Compute the expected return and standard deviation of a portfolio that has 0% of A, 10% of A, 20% of A, etc, until 100% of A. Plot the portfolio frontier formed by these portfolios...
Tommy is examining some risk-free Singapore government securities. The yields to maturity on three government bonds...
Tommy is examining some risk-free Singapore government securities. The yields to maturity on three government bonds with maturities of 1, 2 and 3 years are respectively 3%, 4% and 6%. The bonds all pay an annual coupon andhave the same coupon rate of 1% and a face value of $1,000. Calculate the prices of the three (3) bonds. (i)        Calculate the expected 1-year interest rate for year 2. (ii)       Calculate the expected 1-year interest rate for year 3. Tommy does not understand...
Tommy is examining some risk-free Singapore government securities. The yields to maturity on three government bonds...
Tommy is examining some risk-free Singapore government securities. The yields to maturity on three government bonds with maturities of 1, 2 and 3 years are respectively 3%, 4% and 6%. The bonds all pay an annual coupon and have the same coupon rate of 1% and a face value of $1,000. (a) Calculate the prices of the three (3) bonds. (b) (i) Calculate the expected 1-year interest rate for year 2. (ii) Calculate the expected 1-year interest rate for year...
“Municipal bonds are risk-free securities”. Discuss.
“Municipal bonds are risk-free securities”. Discuss.
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 6.0%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) b. What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 7.0%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) b. What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price...
In the market system of the U.S., the government does play a significant role. Focus on...
In the market system of the U.S., the government does play a significant role. Focus on the industry where you now work. What are the areas (note the plural) where the government performs beneficial functions? Explain your answers. Optional: What are the areas in your industry where the government needs to phase out? Explain. I work in the professional sports industry.
MANAGE RISK Question 2 Legislation and regulations from all levels of government will affect various aspects...
MANAGE RISK Question 2 Legislation and regulations from all levels of government will affect various aspects of business operations and the risk management aspect of business. The impact of legislation and regulations will depend on business operations/ type of business, the number of staff employed, industry sector and the structure of the business. Explain in 100 - 150 words: why it is necessary to have a working knowledge of the legislation involved in business what legislation or regulations apply to...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14.0%. A...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14.0%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) Expected rate of return % b. What would be the expected return on a zero-beta stock? Expected rate of return % Suppose you consider buying...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT