OK, we all know that tresuries are used as the risk free rate, but in reality there is interest rate risk, reinvestment risk (although not for bills) and a small amount of credit risk. I would say that this means telling someone treasury securities are ‘guaranteed’ and ‘riskless’ to clients would be misrepresentation, but the readings seem a bit confused about this. What’s the official line?
Actually, since the US got downgraded, banks have been switching to “overnight index swap” rates, which are basically Fed Funds rates. CFA probably doesn’t mention this though.
Anyway, CFAI says that you can say Treasury payments are guaranteed; that is, you will get paid. However, the investment is not “riskless”, as you are subject to reinvestment and interest rate risk. Riskless and guaranteed are not the same.
Great stuff, thanks Ohai!