Question

Suppose you own $1 million worth of 30-year Treasury bonds. Is this asset riskless?

You own $1 million worth of 90-day Treasury bills. You "roll over" this investment every 90 days by reinvesting the proceeds in another issue of 90-day Treasury bills. Is this investment riskless?

Answer 1

1. To answer the above question correctly the term risk has to be defined. Risk is defined as the likelihood of losing one's investment either in part on its entirety. Reality shows that risk free opportunities in the financial markets do no exist. The US government can collapse in 30 years. In addition to that you have cash tied up for 30 years.

On the other hand, cost effective opportunities do exist when investing in treasury bonds, since one runs the possibility of losing part of the money through default risks and interest rate risks.

2. From the above scenario it can be established that no business investment is absolutely risk less. In investing in treasury bills, one becomes taxable hence losing some of his / her money. The other common risk is inflation, which is evident in every country. If for instance the nation incurs inflation rates of close to 10 percent in a year, the investment risks losing quite a lot over a longer period of time.