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|How can a T-Bill be risky?
By The-Adviser.com -
|New York -
Millions of investors keep money in T-Bills
because they believe there is no risk. This is not true.
Although the government of the United States can technically go bankrupt - the real risk in owning these investments is that the after-inflation returns that you earn on your investments can be extremely low. Thus, there are opportunity costs and a real risk that your returns during your term of ownership may not keep pace with inflation.
The real interest rate on a fixed income investment such as a T-Bill is based on the nominal or stated yield less the inflation rate. Thus, if your T-Bill is earning 5% and inflation is 3%, your real interest rate return is only 2%. Of course, all securities, whether stocks or bonds bear this risk. The benefit of owning stocks and bonds is that there returns are historically higher and the base inflation rate of 3% would still apply.
If you are holding your money for extremely long-periods of time, investing in T-Bills can be risky because you may lose purchasing power.
T-Bills have inflation risk.
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