For the owners of Treasury securities, what are the two greatest risks?

The correct response highlights the two most significant risks faced by owners of Treasury securities: interest-rate risk and inflationary risk.

Interest-rate risk refers to the potential for changes in interest rates to negatively impact the value of a bond. When interest rates rise, existing bonds with lower interest rates become less attractive, causing their market values to decrease. This is particularly important for Treasury securities, which are often held as a long-term investment. Owners must be aware that fluctuations in interest rates can lead to capital losses if they decide to sell before maturity.

Inflationary risk is the risk that inflation will erode the purchasing power of the fixed interest payments or principal returned at maturity. Treasury securities typically provide a fixed income stream, and if inflation rises significantly, the real value of those cash flows diminishes. This is a significant concern for investors who depend on the predictable returns of Treasury securities, as their returns may not keep pace with rising prices.

While other risks like liquidity and operational risks are relevant in the broader context of investing, interest-rate and inflationary risks are specifically critical for Treasury securities due to their fixed-income nature and their long-term duration relative to potential changes in the economic environment.