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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.

AbstractIn this paper the put‐call parity implied riskless rate of borrowing and lending is re‐examined. Using a rigorous model, it is shown that, given the level of an observable proxy of the risk‐free rate of lending (T‐bill rates, for example), the put‐call parity provides an opportunity to borrow at rates substantially below the market rate of lending. This is especially true when high interest rates prevail. The major conclusion is either that American option prices may invalidate the parity, or that option markets are not as frictionless as one might wish.

The aim of this paper is to determine if the implied forward rates derived from the bond market are a good indicator of the future risk-free rate and understand why discrepancies between these two variables may occur. The fundamental principles of finance will be reviewed in order to explain how time and risk affect the value of money. Then, it will be shown why government' securities are often used as risk-free assets, and therefore, their rate of return is used as the risk-free rate of return in most of the valuation methods. Finally, a quantitative analysis will be performed using data from the U.S. Board of Governors of the Federal Reserve System and Survey of Professional Forecasters. It will find that the accuracy of implied forward rates depends on the length of the forecast and the type of bond. Therefore, taking that into account combined with the fact that implied forward rates data can be easily accessed, this paper concluded that implied forward rates can be used as a reliable indicator of the future risk-free rate if time and resources are a constraint.