Consigo, Carl Justin V.

BSBA Financial Management 3 FM – 2

Capital Market
Module 8 Assignment

Is there really no risk in investing in government securities? Why?

- Investing in government securities is often considered a relatively safe option as

governments are considered less likely to default on their debts compared to
private entities. However, it is important to note that no investment is entirely risk-
free, and there are still some risks associated with investing in government
securities.

One of the risks associated with investing in government securities is interest rate
risk. Government securities, such as Treasury bonds, are sensitive to changes in
interest rates. If interest rates rise, the value of the bonds will fall, resulting in a
loss for the investor if they need to sell the bond before maturity. This risk can be
mitigated by holding the bond until maturity, but it is still something to be aware of.

Another risk associated with investing in government securities is inflation risk. If

inflation rises faster than the yield on the bond, the real value of the investment will
decrease. For example, if an investor buys a bond with a yield of 2% and inflation
is at 3%, the investor is effectively losing money in real terms.

Finally, there is also the risk of political risk associated with investing in government
securities. While governments are considered less likely to default compared to
private entities, there is still a risk that political instability or changes in government
policies could impact the value of government securities. For example, if a
government were to default on its debts or if there were a sudden change in policy
that impacted the economy, the value of government securities could be affected.

In conclusion, while investing in government securities is generally considered a

relatively safe option, there are still risks associated with this type of investment,
including interest rate risk, inflation risk, and political risk. It is important for
investors to be aware of these risks and to consider them when making investment
decisions.