Prof Lord Mensah Writes: Government T-Bills and bonds are not risk-free
There is no theory that says government bills and bonds are risk-free. Risk-free instruments are usually attributed to Tbills. Even with the T-bills, what makes it risk-free is not clearly defined.
The investor must know that Tbills can only be risk-free relative to other government instruments.
There are so many types of risks in the financial market, including Interest rate risk, inflation risk, default risk, taxability risk, liquidity risk and credit risk. Which of these risks is treasury bills and government bonds free from?
At least economics and financial history has to taught as that governments has been defaulting on their bonds and bills. Therefore, government instruments are not free from default risk. We have global examples of governments defaults on T-bills and Bonds, so what makes you think it cannot happen in Ghana.
Secondly, when you buy these instruments and you are holding them on a fixed rates, the rate on the market may go above or below your rate making it not free from interest rate risk.
On the heels of inflation risk. Let’s assume you invested in T-bills with the anticipation that you would buy 100 of bags of cement with the proceeds. At maturity, the price of one cement bag may go up to the point where you cannot buy the 100 bags of cement.
In sum the purchasing power of your investment has reduced, making it not free from inflation risk.
Finally, we use variations (variance, range etc.) of historical data to measure risk. Historical data of T-bills and government bond rates has never recorded zero variations, and so they are not risk-free.
