That's what I don't get. Why are bonds considered risk free if their value can drop when interest rates go up? Sure, they may be worth $1200 in 10 years, but they're only worth $835 now, when they were worth $1000 yesterday.
Risk may be lower than buying shares in a company at risk of bankruptcy, but it's hardly risk free. These things can go up and down just like normal share prices.
There’s no default risk, that’s all. “Risk-free” only refers to the risk of default. Every (fixed-rate) debt instrument has unavoidable interest rate risk. And the floating rate ones are just transmuting it into default risk.
You are correct, these are two different kind of risks. The "risk-free" rate refers to counterparty risk (which should be zero when the counterparty has the money printer, or can be bailed out by the money printer.)
That's what I don't get. Why are bonds considered risk free if their value can drop when interest rates go up? Sure, they may be worth $1200 in 10 years, but they're only worth $835 now, when they were worth $1000 yesterday.
Risk may be lower than buying shares in a company at risk of bankruptcy, but it's hardly risk free. These things can go up and down just like normal share prices.