Suppose you owned a portfolio consisting of $250,000 worth of long-term U.S. government bonds.?

Question

Would your portfolio be riskless?

Answer 1

It depends on the bonds, but you will lose on many types of U.S. bonds about 3% compounded each year in wealth. With all bonds, you may lose some wealth, compounded, each year. You have to factor in inflation and taxes. So let's say the rate of the bond is 5% and there is 4% inflation. That leaves you with 1%, but you get taxed about 28% on the 5%. That leaves you with a negative .4% yield compounded if you held it for one year.

Answer 2

No it is not riskless, but it would be considered very low risk.

The country could eventually go bankrupt and not be able to pay the debt (bond) to you. It happens to countries. Happened to Russia within the past 20 years. Everyone who invested in Soviet Union Goverment Bonds lost money.

Also you must worry about the bond not being able to keep up with inflation. You can lose the buying power of your money if it is not invested at a higher yield than inflation. ie. your grandparents used to be able to by a candybar for a penny. Now you can't find a candybar for a penny. A penny had more buying power when your grandparents were young. Same can happen with your $250,000. Look at the housing market. In the past 10 years houses cost almost twice as much. A bond would doubtly double its value in 10 years.

Answer 3

a. you would be paid lower back to $250k all top, the question is how lots this money would be well worth. the government is printing money top now. evaluate this: if to procure 250k Zimbabwean bonds 30 years in the past (in Zimbabwean money), you would be paid that lower back immediately, besides the shown fact that it may well be well worth a tiny fraction of a penny. b. T-costs and different bonds are grossly overpriced top now. there is an entire slew of bonds (in spite of the reality that no longer T-costs) that yield an useful 0% with the aid of fact they are offered at this kind of top type to their par fee that the pastime will purely make you entire with none income. Thank to extensive dislocations interior the financial equipment created by utilising the government. c. there isn't any such element as a secure investment. Even procuring gold contains threat. the only element you're able to do is to administration unfavorable aspects and stack up odds on your prefer.

Answer 4

What does the phrase, "Backed by the full faith and credit of the United States" mean to you?

If you believe the government cannot default then it is riskless. It depends on your definition but remember we went off of the gold standard for a reason.

Answer 5

The biggest risk you face is inflationary risk. If inflation rises at a rate higher than the return on your bonds (which is something that very well could happen), then you effectively are losing money since the purchasing power of that $250,000 will be less in the future than it is now.