January 19th, 2011, 6:48 pm
QuoteOriginally posted by: armchairquantEverything I've been reading uses the US Treasuries as the risk-free rates because of their nature of practically never defaulting (since they can always print more money).Printing more money, and the inflation that it brings, is a type of default. If someone promises to give you 100 "Dollars" in 30 years and those 100 "Dollars" don't buy as much wheat, copper, labor, rent, etc. when the 30 years are up, is that any different than if the borrower defaulted but paid you in "Dollars" that still bought the same amounts of wheat, copper, labor, rent, etc. as you expected?In practice, no one thinks of the UST as strictly risk-free but also factors in CDS prices on UST (which mostly corrects for the chance of default) and UST-TIPs spread (which mostly corrects for the expected level of inflation)