required by law to pay a fee to the FDIC, based on the size of its deposits. Then, if a bank should go bankrupt

and not be able to repay depositors, the FDIC guarantees that all customers will receive their deposits back up

to $250,000.

The bottom line on bank accounts looks like this: low risk means low rate of return but high liquidity.

Bonds

An investor who buys a bond expects to receive a rate of return. However, bonds vary in the rates of return that

they offer, according to the riskiness of the borrower. We always can divide an interest rate into three

components (as we explained in Choice in a World of Scarcity): compensation for delaying consumption, an

adjustment for an inflationary rise in the overall level of prices, and a risk premium that takes the borrower’s

riskiness into account.

The U.S. government is an extremely safe borrower, so when the U.S. government issues Treasury bonds, it can
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