Fixed Income Securities Project
Author:
Genre: Finance

How will financial markets adjust to a loss of faith in the idea of risk-free sovereign bonds? Will there be enough suitable collateral for the banking system to function smoothly?

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Article Review

As we Know that Fixed Income Securities Project is related to the Risk Free Rate .For long time now, the risk free rate is used by the financial analyst for measuring risk of various types of financial instruments and pricing them. The idea of risk free rate is central to the smooth functioning of the economy. It serves as a base to various analysis without which it will be very difficult analyze almost every financial parameter. In this article, Fisher challenges the relevance of the risk-free sovereign bonds as a base for risk free rate in today’s economic situation based on the recent history of the same. Further, he goes on to analyze the impact of loss of faith in the idea of risk free sovereign bonds.

The article starts with a claim that we live in a world without risk free assets implying that the risk free sovereign bonds are not risk free. The claim is prima-facie backed by the history of volatility in interest rate of the risk free sovereign bonds and recent economic developments. In the beginning, Fisher throws light on the six financial concepts relevant to the idea of risk free rate to make the readers clear about the subject in question. The author claims that the risk free sovereign bonds have been used as proxies to all the six financial concepts explained in the article in the recent years which is not a necessary condition. In the main body of the article author focuses on the seven claims which support the central claim of the article that there are no risk free assets in today’s economy. All these seven claims have been discussed with supportive arguments and its implications on the behavior of investors, bankers and financial markets. The central and very argument in most of these seven claims is that in today’s economic situation, there is no such thing as risk free sovereign bonds because the interest rate on sovereign bonds are volatile, have duration, curve and inflation risks. On the implications of world without risk free assets, the author argues that the banking system is running out of good collateral to function smoothly. The investors will find it difficult to price the financial instruments and will tend to move towards equities as they find that the sovereign bonds are also risky.

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