Which financial instrument typically has the least default risk?

Which financial instrument typically has the least default risk?

• A. Commercial paper
• B. Cerificates of deposit
• C. U.S. Treasury bills
• D. Federal agency issues

Answer: (C)

U.S. Treasury bills are often regarded as having the least default risk among financial instruments. This is primarily because they are backed by the full faith and credit of the U.S. government. The Treasury has the authority to levy taxes and print money, making it highly unlikely that it will default on its obligations. As a result, investors view Treasury bills as a safe haven, especially during times of economic uncertainty. In contrast, while certificates of deposit and federal agency issues are generally considered low-risk investments, they do carry slightly more risk than Treasury securities. Although these instruments are relatively stable, they are still subject to credit risk and economic fluctuations that could affect the issuing institution. Commercial paper, although useful for short-term financing and typically issued by financially sound corporations, can pose higher default risks during economic downturns since it is not backed by the government and relies on the issuer's creditworthiness.

U.S. Treasury bills are often regarded as having the least default risk among financial instruments. This is primarily because they are backed by the full faith and credit of the U.S. government. The Treasury has the authority to levy taxes and print money, making it highly unlikely that it will default on its obligations. As a result, investors view Treasury bills as a safe haven, especially during times of economic uncertainty.

In contrast, while certificates of deposit and federal agency issues are generally considered low-risk investments, they do carry slightly more risk than Treasury securities. Although these instruments are relatively stable, they are still subject to credit risk and economic fluctuations that could affect the issuing institution. Commercial paper, although useful for short-term financing and typically issued by financially sound corporations, can pose higher default risks during economic downturns since it is not backed by the government and relies on the issuer's creditworthiness.