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Are Risk Free Government Bonds Risk Free Indeed

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  • Yakim Kitanov

Abstract

It has been considered that government bonds in their varieties are risk-free. This has led to the accumulation of debt in the form of this type of securities by many investor, both institutional and individual. Contrary to the common understanding that government bonds are risk-free, they are not. They are exposed to at least three types of risks: 1) risk of default (credit risk), 2) inflation risk, and 3) currency risk. It is correct to consider that they are guaranteed in terms of nominal value but since risk of default exists, this means that they are actually not guaranteed even in terms of nominal value. The aim of the current paper is to present a conceptual framework related to the main types of risks associated with government bonds and to outline some important considerations for investors in this respect.

Suggested Citation

  • Yakim Kitanov, 2015. "Are Risk Free Government Bonds Risk Free Indeed," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 9(1), pages 523-530.
    • Handle: RePEc:isp:journl:v:9:y:2015:i:1:p:523-530
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    References listed on IDEAS

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    1. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2018. "Banks, government Bonds, and Default: What do the data Say?," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 98-113.
    2. Michael Ehrmann & Marcel Fratzscher, 2015. "Euro Area Government Bonds: Integration and Fragmentation during the Sovereign Debt Crisis," Discussion Papers of DIW Berlin 1479, DIW Berlin, German Institute for Economic Research.
    3. Lang, Michael & Schröder, Michael, 2014. "What drives the demand of monetary financial institutions for domestic government bonds? Empirical evidence on the impact of Basel II and Basel III," ZEW Discussion Papers 14-123, ZEW - Leibniz Centre for European Economic Research.
    4. Siti Nuryanah & Sardar M. N. Islam, 2015. "Corporate Governance and Financial Management," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-43561-3, December.
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    Cited by:

    1. Stanislav Dimitrov, 2019. "Pension Wealth In The European Union – Tendencies, Problems And Solutions," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 13(1), pages 32-42.
    2. Stanislav Dimitrov, 2018. "Adequate And Sustainable Pensions - Where Is The Balance Between Pay-As-You-Go Public Pensions And Capital Pensions," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 12(1), pages 142-152.

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    More about this item

    Keywords

    government bonds; currency risk; credit risk; financial risk;
    All these keywords.

    JEL classification:

    • A - General Economics and Teaching

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