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I may be wrong but I think when you say risk free you just mean there’s no risk of it not paying out. Inflation is a separate potential threat, for which there
by b_tterc_p 7y ago
I may be wrong but I think when you say risk free you just mean there’s no risk of it not paying out. Inflation is a separate potential threat, for which there are inflation protected treasury assets?
- chrisseaton 7y agoThe risk is that it pays out, but what it pays out is less value than you paid in, due to inflation. It's effectively less money you're getting out, even though the number is the same. Sometimes inflation is so high that you would effectively get nothing back. You can't call that 'risk free.' You also risk that the bond is not honoured - that's a really low risk for the US Government, but it's also not 'risk free.'
- kgwgk 7y agoYes, "risk free" has a technical meaning which doesn't include inflation risk. But it may be misleading when used in a non-technical context. Even if we assume for the sake of the argument that there is no default risk at all in government bonds you have risks linked to inflation and changes in interest rates (they affect the value of your investment before maturity and your ability to reinvest the coupons received according to the initial expectations).