Question

Consider the statement "U.S. government bonds have been downgraded by the rating agencies in recent years...

Consider the statement "U.S. government bonds have been downgraded by the rating agencies in recent years due to an increased level of risk brought on by our growing federal debt burden. Therefore, there is no such thing as a "risk-free" rate of interest." What do you think?

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Answer #1

Risk free rate of interest is not exactly risk free as American debt has grown multifold and there will be a time for repayment of such excessive leverage on the books of federal reserve.

The U.S government bonds donot carry much risk but it carry risk in form of government default. It is assumed that the government can never default in any situation so these bonds are rated as risk free but reality is not as good as it looks.

The American government has taken too much of credit to boost the growth of overall economy and there are economic cycles and debt cannot be deferred infinitely so there will be culmination of long term debt cycle and then the American government will have to repay it's debts.

So it cannot be said that government bonds are risk free assets rather it can be said that they have relatively lowest risky exposure than other securities of American markets.

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