What is a risk-free bond?
A risk-free bond refers to a bond issued by an entity that’s considered absolutely certain to pay back both its principal and interest, with no risk of default. Generally, bonds issued by governments of sovereign developed nations, such us U.S. Treasury bonds, are considered to be risk-free.
Where have you heard about a risk-free bond?
Many investment advisers recommend that their clients keep a certain portion of their portfolio invested in risk-free bonds. The amount depends on your risk appetite – if you lean more toward a defensive style then the ratio of risk-free bonds in your portfolio should be higher, and vice-versa.
What you need to know about a risk-free bond.
It's important to remember that not all government bonds are risk-free. For instance, in 1998, the Russian government defaulted on its own debt causing a regional financial crisis. Ever since the financial crisis of 2008, some European government bonds have priced in a risk of sovereign default. As of August 2017, no such default has occurred. However, U.S. Treasury bonds can be considered to be virtually risk-free. Even in times of crisis, the chance of the U.S. government defaulting on its debt is virtually zero. For the risk-averse investor they’re attractive, although the lower risk generally means a lower return.