Can the bonds issued by foreign governments be considered risk free? Why?

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Question

Answer 1

Answer #1

No, Bond issued by foreign government can’t be considered as risk free. There are many reasons mentioned below:

Country Risk: Country’s financial health, ongoing and future performance risk is always associated with foreign government bonds. What if country is out of funds to repay all the obligations (Principal and Interest), this can result full or partial losses for the investors.
Political Risk: Investors looks for stable and compliant government, any change in political scenario can make bond prices highly volatile so the risk.
Currency Risk: Mostly foreign government bond is issued in the currency of issuing country and interest will be paid in issuing country’s currency so clearly currency risk is associated there. In case of unfavorable currency fluctuation for investor is a clear risk.
Interest Rate Risk: Like home country bonds, international bonds are prone to interest risk. In case of any change in interest rate in the bond issuing country, bond prices can react accordingly.

There can be further minor risks like inflation risk, central bank policies etc..

Hope this helps, feel free to share your feedback.

Answer 2

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