Los 51.i states that the US government debt is not rated by any nationally recognized rating agency. This is not true. It is rated by the big 3 rating agencies at both issuer and issuance level.
Is that important? You always need benchmark and US debt is always rated AAA like risk-free securities,isn’t it? It doesn’t matter whether someone will rate it or not.
I think his point is that CFAI made a mistake in their text (and quite a blatant one too). US debt can be downgraded, by the way. It’s just highly unlikely.
The only defense I may have is “nationally recognized rating agency”, should it be “globally recognized rating agency”? I know it sounds funny.Anyway,this is a joke. The text is wrong then.
An AAA rating is not risk free and credit rating agencies ratings are only opinions. It is possible that the US could lose it’s rating : http://www.nytimes.com/2010/03/16/business/global/16rating.html I doubled checked the 2011 CFAI text and it is not in there. I actually read it from the schweser text. Either CFAI changed it, or it is schweser that made the error.
I think you need to mention what type of US debt it is. Risk-free US treasury is usually bills thay run fairly short-term(3-month or 1-month);credit ratings usually are on bonds (over 1 year horizon). I could be wrong though. Again,not being there doesn’t mean it is wrong - maybe it doesn’t make sense to cause further confusion around this or it may not be tested anyway.
Yes you are wrong. I did mention that what type of debt - issuer and issuance (this includes bill,notes …etc). If you do some additional reading outside the CFAI text it will help with your confusion. Historically, US debt (bills) has been thought to have zero credit risk, if they lose that rating, then that can longer be the case. Never mind a single question on an exam, look at the bigger picture. I think this is a major mistake by schweser.
The curriculum treats the US bonds/bills as if it is the global standard for measuring other bonds but in the Level 1 text, it was stated that the US bonds/bills are NOT risk free. They are still exposed to interest rate risk, anyway. The German bonds may just be safer than the US bonds.
Ok,what credit rating agency does is they only rate credit risk so in that sense, if you say AAA is risk-free,it is talking about credit risk-free. Why would you mention interest rate risk though? Another thing is there is no security that bears no credit risk in reality and that’s why we treat US treasuries as proxy for risk-free securities. Of course US debt is rated by Moody’s,and soverign debt situation or other factors might cause Moody’s to downgrade,then the current theory of treating US Treasury as risk-free when we use CAPM for example needs to be revised. The build-up method of calculating cost of equity or debt will have to be revisited. What’s the point of possible downgrading?I don’t see that can happen in the near future nor in the relatively long future.Otherwise US government would have gone bankruptcy already.
here’s an article relevant to this thread http://voices.washingtonpost.com/political-economy/2010/09/imf_ponders_the_improbable_wil.html