Supposed you owned a portfolio consisting of $25,000 of US government bonds with a maturity of 30 years.
Would your portfolio be riskless?
In order to determine whether a portfolio of $25,000 of US government bonds with a maturity of 30 years is riskless, we need to consider several factors.
First, U.S. government bonds are generally considered to have a very low default risk because they are backed by the full faith and credit of the United States government. This means that the likelihood of the U.S. government defaulting on its debt obligations is highly unlikely.
However, even though U.S. government bonds are considered relatively safe, they are still subject to certain types of risk. One such risk is interest rate risk. If interest rates rise, the value of existing bonds with fixed interest rates, like the ones in your portfolio, tends to decrease. This is because investors can get higher yields from newly issued bonds that reflect the higher interest rates.
Another risk to consider is inflation risk. Inflation erodes the purchasing power of future cash flows, including the interest payments from bonds. If inflation rises, the real return on bonds decreases, reducing the value of your portfolio in real terms.
It is important to note that even though U.S. government bonds are perceived as low risk, no investment is completely risk-free. Unexpected events or changes in market conditions could lead to losses even in supposedly safe investments.
To determine the risk level of your portfolio, it is advisable to assess your own risk tolerance, investment objectives, and time horizon. Additionally, diversifying your portfolio across different asset classes and sectors can help mitigate risk.
It is recommended to consult with a financial advisor or conduct further research to make an informed decision about the risk level of your investment portfolio.