Re:Joint Statement by the Department of the Treasury, Federa...
by mcv on Monday March 13, 2023 @06:08AM
(#35133536)
> risk-free investment
That's what I don't get. Why are bonds considered risk free if their value can drop when interest rates go up? Sure, they may be worth $1200 in 10 years, but they're only worth $835 now, when they were worth $1000 yesterday.
Risk may be lower than buying shares in a company at risk of bankruptcy, but it's hardly risk free. These things can go up and down just like normal share prices.
Re:Joint Statement by the Department of the Treasury, Federa...
by jkhdigital on Monday March 13, 2023 @07:23AM
(#35134153)
There’s no default risk, that’s all. “Risk-free” only refers to the risk of default. Every (fixed-rate) debt instrument has unavoidable interest rate risk. And the floating rate ones are just transmuting it into default risk.
Re:Joint Statement by the Department of the Treasury, Federa...
by xmcqdpt2 on Monday March 13, 2023 @07:28AM
(#35134189)
You are correct, these are two different kind of risks. The "risk-free" rate refers to counterparty risk (which should be zero when the counterparty has the money printer, or can be bailed out by the money printer.)
The US 10 year treasury interest rate is 3.7% right now. That means you can get $1200 in 10 years with $835 today at 3.7% compounding; 1200 / 1.037^10 = 834.44 and change.
So your $1000 worth of bonds is actually only worth about $835, at best, because that's the market price for a (close as possible to) risk-free investment which matches the return at maturity.
Inflation is the flip-side of this. You can reasonably expect $1200 in 10 years to be worth about what $835 is today. It might be less, it might be more, but it's an estimation with money behind it.