1. Common stock
2. Preferred stock
3. Bond fundamentals
4. Corporate debt
5. Municipal debt
6. US government debt
6.1 Review
6.2 Treasury products
6.3 Federal agency products
6.4 The market & quotes
6.5 Suitability
6.5.1 Benefits
6.5.2 Risks
6.5.3 Typical investor
7. Investment companies
8. Alternative pooled investments
9. Options
10. Taxes
11. The primary market
12. The secondary market
13. Brokerage accounts
14. Retirement & education plans
15. Rules & ethics
16. Suitability
17. Wrapping up
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6.5.2 Risks
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6. US government debt
6.5. Suitability


Other than default and liquidity risk, most of the other “normal” bond risks apply, including interest rate risk, inflation (purchasing power) risk, and reinvestment risk.

The longer the maturity, the more subject to interest rate risk and inflation risk. Of course, TIPS are not subject to inflation risk. Other long-term securities are very subject to these risks. As we learned in the bond volatility section, long-term, low coupon bonds are very susceptible to interest rate risk. Therefore, STRIPS and Treasury Receipts fall significantly in price when interest rates rise. Inflation and interest rates are very closely tied together. As you learned on the SIE exam, the Federal Reserve works to raise interest rates when inflation rates rise more than expected.

The higher the coupon and more frequent interest payments, the more reinvestment risk applies. When interest rates fall, interest payments begin to be reinvested at lower rates of return. Zero coupon securities like Treasury bills, STRIPS, and Treasury Receipts avoid reinvestment risk (there’s no interest to reinvest), but the other debt securities discussed in this chapter do not. Mortgage-backed securities are particularly subject to reinvestment risk due to their monthly payments. The more payments to reinvest, the more reinvestment risk.

Key points

US Government debt risks

  • Longer-term maturities subject to interest rate and inflation risk
  • TIPS are not subject to inflation risk
  • Reinvestment risk applies unless zero coupon

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