Multiple choice: Which one is correct? Under what circumstances would purchasing
ID: 1203543 • Letter: M
Question
Multiple choice:
Which one is correct?
Under what circumstances would purchasing a Treasury Inflation Protected Security (TIPS) from the U.S. government be virtually risk free? Purchasing a TIPS from the U.S. government would be virtually risk free only if the government provided an explicit guarantee that it would honor its obligations relating to the security. There is no way to make any security, even one issued by the U.S. government, virtually risk free. As default risk and interest-rate risk are negligible or absent with a TIPS, purchasing one would be virtually risk free if its maturity exactly matched your investment horizon, thus eliminating inflation risk. As default risk and inflation risk are negligible or absent with a TIPS, purchasing one would be virtually risk free if its maturity exactly matched your investment horizon, thus eliminating interest rate risk.Explanation / Answer
Answer:
Purchasing a TIPS from the U.S. government would be virtually risk free only if the goverment provided an explicit guarantee that it would honour its obligations relating to the security.
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