Treasury bonds are

Question

Treasury bonds are

BlackTom AI · Accepted Answer

First, let me restate the question and all the answer choices to ensure clarity about what's being evaluated.
Question: Treasury bonds are

Options:
- a. long-term debt instruments issued by the government to fund the Commonwealth budget deficit and are considered risk-free.
- b. long-term debt instruments issued by the government to finance the commonwealth budget deficit, and have higher default risk than corporate bonds.
- c. short-term debt instruments issued by corporations.
- d. short-term debt instruments issued by the government to inject funds into the banking system.

Now, let's analyze each option in turn to understand why it is true or false.

Option a: This statement describes Treasury bonds as long-term government debt instruments used to fund the budget deficit and characterizes them as risk-free. In many contexts, Treasury bonds are indeed long-term securities issued by the government, and they are often considered to carry very low default risk because they are backed by the government. However, the claim that they are entirely risk-free is an overstatement; they do carry interest rate risk and, in theory, sovereign risk exists, though the risk is regarded as extremely low for stable governments. The phrase 'risk-free' is commonly used as an approximation in risk models for high-quality government securities, but in precise terms, there is still some risk under certain conditions. So this option conveys the mainstream view with a minor caveat about 'risk-free' being an idealization.

Option b: This option says Treasury bonds are long-term government debt instruments to finance the budget deficit and have higher default risk than corporate bonds. This contradicts standard finance understanding: government bonds are generally considered to have lower default risk than most corporate bonds, not higher. Therefore, this option is incorrect on the default risk comparison, and it misstates the risk profile relative to corporate debt.

Option c: Here, Treasury bonds are described as short-term debt instruments issued by corporations. This is incorrect on two counts: they are not issued by corporations, and they are not short-term (they are long-term). Thus, this option completely mischaracterizes Treasury bonds.

Option d: This claim says Treasury bonds are short-term debt instruments issued by the government to inject funds into the banking system. This is inaccurate because Treasury bonds are long-term, not short-term, and while government securities can be used in various open market operations, the essential description as short-term debt instruments is false. It also misattributes their purpose to injecting funds into the banking system rather than funding government deficits and managing the national debt.

In sum, Option a aligns most closely with the conventional description of Treasury bonds as long-term government debt instruments associated with funding budgets and perceived as very low risk, albeit not literally zero risk. The other options conflict with fundamental facts about who issues Treasury bonds (government, not corporations), their maturity profile (long-term, not short-term), and their risk relative to corporate debt (generally lower default risk, not higher).

Treasury bonds are

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