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It’s not actually risk free. It’s considered risk free by the markets right now. If the US treasury bonds Lost their status as risk-free, all valuation models w

It’s not actually risk free. It’s considered risk free by the markets right now. If the US treasury bonds Lost their status as risk-free, all valuation models would collapse and the markets would have to move/rush to some other instrument that could be considered risk-free. For example, black-scholes which values options requires the concept of a risk-free asset. Also, it’s not guaranteed profits if the interest rate were negative, which happened during the financial crisis. As well, real interest rates, vs inflation, are negative. So it depends on your perspective.

dmurray 9y ago
> For example, black-scholes which values options requires the concept of a risk-free asset. This isn't really true. The risk-free asset doesn't have to exist, we just have to agree on what its value would be. For example if Tesla sold a one-year bond paying 20% interest, and everyone agreed Tesla had a 10% chance of being bankrupt within the year, it's fair to agree the risk-free rate is 10% per year. It's true that if the US government were at risk of defaulting on Treasuries, the market would be a bit of a mess. But it happens in other countries all the time and the markets eventually continue to function without an asset considered risk free.