Question

Fixed-income securities consist of debt instruments and preferred stock. Bonds are debt securities in which a borrower promises to pay a specified interest rate and principal at a future date.

1) Which of the following statements about Treasury bonds is the most accurate?

a) Treasury bonds are completely riskless.

b) Treasury bonds have a very small amount of default risk, so they are not completely riskless.

c) Treasury bonds are not completely riskless, since their prices will decline when interest rates rise.

Answer 1

C) Treasury bonds are not completely riskless, since their prices will decline when interest rates rise.

Step-by-step explanation:

Treasury bonds refer to debt instruments issued by the federal government which yield interest till maturity and pay principal amount to the owners upon maturity.

Such bonds are kind of government bonds wherein the issue is backed by government's commitment to pay the bond holders. Therefore such bonds are less risky and highly liquid.

Since these bonds are less risky and highly liquid, they also offer lower rate of coupon payments than corporate bonds.

The risk in treasury bonds does not arise out of repayment default, but owing to the market conditions.

For example, if the market rate of interest rate rises, the value of such bonds falls. So, if an investor decides to sell them, he'll incur a loss as there is a fall in their market value.