The Difference between the Bond and Treasury Bill - Essay Example

Government securities are considered to be risk-free as the government is treated as the most reliable and definite source of paying back the investor. The difference between the bond and Treasury bill is the nature of their maturity but the issuer however is the same which is the government.

‘Risk-free rate of interest is the rate of interest on a debt instrument with no default, maturity or liquidity risk.’ (Melicher & Norton, 2011) By definition, the portfolio of government bonds has liquidity and interest rate risk due to the length of its maturity period but for long-term investments, the Treasury bond reflects a more logical default-free holding period return for longer-term investments. Treasury bill is the closest example of riskless securities as they hold zero or very minimal liquidity and maturity risk. The $250,000 portfolio of Treasury bills is more risk-free compared to the Treasury bond portfolio of 30 years maturity. However, governments meant these achieve also defaulted in various parts of the world therefore, there is no complete risk-free security in the practical sense. Read More