Risk-free bond

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A risk-free bond is a theoretical bond that repays interest and principal with absolute certainty. The rate of return would be the risk-free interest rate. In practice, government bonds are treated as risk-free bonds, as governments can raise taxes or indeed print money to repay their domestic currency debt.[1]

For instance, United States Treasury notes and United States Treasury bonds are considered risk-free bonds, even though investors in United States Treasury securities do face a negligible amount of credit risk. An example of this credit risk was shown by Russia, which defaulted on its domestic debt in 1998.

Application[edit]

When hedging according to formulas like Black–Scholes a risk-free bond would be purchased (or sold) accordingly.

See also[edit]

References[edit]

  1. ^ "Belgium’s KBC scraps ‘risk-free’ practice on sovereign bonds - FT.com".