Canadian Securities Course (CSC) Level 2 Practice Exam

What risk is represented by Treasury bills in the context of investments?

1. Interest rate risk

2. Default risk

3. Business risk

4. Risk-free rate of return

The correct answer is: Risk-free rate of return

Treasury bills are short-term government securities that are considered virtually risk-free investments due to their backing by the government. The primary risk assessment related to investing in Treasury bills is that they provide an indicator of the risk-free rate of return. This rate is the return expected from an investment that is assumed to have no risk of financial loss, as the government is highly unlikely to default on its debt obligations. While Treasury bills do present some nominal risks, such as interest rate risk (the potential for the value of the T-bills to decrease if interest rates rise) or inflation risk (the risk that inflation could outpace the returns), these are not as significant as the perception of Treasury bills being risk-free. Thus, investors often use the yield on T-bills as a benchmark for assessing other investments, particularly when considering their risk and return profile. This understanding underscores the iconic status of Treasury bills as a cornerstone for risk analysis in investment theory, affirming their association with the concept of a risk-free rate of return.