Why are government bonds considered to be risk free?

Asked by Judith Matos on September 16, 2021

Categories: Personal finance Mutual funds

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A risk-free asset has a certain future return. Treasuries (especially T-bills) are considered to be risk-free because the U.S.government backs them. Because they are so safe, the return on risk-free assets is very close to the current interest rate.

What is the risk of government bonds? Government bonds are usually viewed as low-risk investments, because the likelihood of a government defaulting on its loan payment tends to be low. But defaults can still happen, and a riskier bond will usually trade at a lower price than a bond with lower risk and a similar interest rate.

How is bond risk measured? Duration and convexity are two tools used to manage the risk exposure of fixed-income investments. Duration measures the bond's sensitivity to interest rate changes. Convexity relates to the interaction between a bond's price and its yield as it experiences changes in interest rates.

What is liquidity risk in bonds? Liquidity risk Liquidity refers to the investor's ability to sell a bond quickly and at an-efficient price, as reflected in the bid-ask spread. High-yield bonds can sometimes be less liquid than investment-grade bonds, depending on the issuer and the market conditions at any given time.

Do bonds do well in a recession? Fixed-Income Recession StrategyAs investors sell these risky assets, they seek safety andmove into U.S. Treasury bonds. In other words, the prices of risky bonds go down as people sell, meaning the yields on these bonds increase; the prices of Treasury bonds go up, meaning their yields decrease.