Which of the following is referred to as risk-free bond?
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A. B. C. D.A
A risk-free bond, also known as a risk-free asset or risk-free security, refers to a financial instrument that is considered to have virtually no credit risk. In other words, it is an investment that is assumed to have a guaranteed return of principal and interest payments.
Among the options provided, the most appropriate answer for a risk-free bond is option A: Government Bond. Here's why:
A. Government Bond: Government bonds are issued by the national government of a country. They are considered one of the safest investments because they are backed by the full faith and credit of the government. Governments typically have the power to levy taxes and print currency, which allows them to fulfill their payment obligations on these bonds. As a result, government bonds are generally perceived as having minimal credit risk, hence being regarded as risk-free. However, it's worth noting that there may still be some degree of interest rate risk associated with government bonds due to changes in market interest rates.
B. Municipal Bond: Municipal bonds, also known as munis, are issued by state or local governments, such as cities, counties, or school districts, to fund public projects like infrastructure development or schools. While municipal bonds are generally considered relatively safe investments, they do carry some degree of credit risk, as the financial stability and ability to repay the bonds depend on the issuer's financial health. Therefore, municipal bonds are not typically classified as risk-free bonds.
C. Sovereign Bond: Sovereign bonds are debt securities issued by foreign governments in a currency other than their own. These bonds are backed by the respective national governments, similar to government bonds, and are generally considered to have low credit risk. However, the term "sovereign bond" is more commonly used to refer to government bonds issued by foreign countries, rather than risk-free bonds in general. While sovereign bonds issued by financially stable countries are often perceived as relatively safe, they may still carry some degree of credit risk and are not necessarily classified as risk-free.
D. Junk Bond: Junk bonds, also known as high-yield bonds, are issued by companies or entities with a higher risk of defaulting on their debt obligations. These bonds have lower credit ratings and are considered speculative investments. Junk bonds are characterized by higher yields to compensate for the increased credit risk. Consequently, junk bonds are far from risk-free and are generally considered to have a higher level of risk compared to other bond types.
In summary, among the options provided, the most appropriate answer for a risk-free bond is A. Government Bond, as government bonds are generally considered to have minimal credit risk and are backed by the full faith and credit of the government.