Question

In: Finance

What are the factors that contribute to credit risk of corporate bonds(please explain in detail)

What are the factors that contribute to credit risk of corporate bonds(please explain in detail)

Solutions

Expert Solution

The factors that contribute to the credit risk of corporate bonds are:

1. Risk of non payment :Unsecured bonds are faced with the risk of non payment of the bond principal at the end of the tenure by the company issuing the bonds. This can be due to liquidity crunch, shut down of the company or market slow down.

2. Risk of non payment of interest: Interest payment annually or semi annually as per the bond conditions is mandatory for bonds and the risk of non payment of interest each period prevails. This may arise due to losses incurred by the company, lack of short term liquidity.

3. Interest rate risk: The bonds yield to maturity may reduce as a result of prevailing market interest rates and may be the bond investment a less worthwhile investment prompting sale of bonds by the investors.

4. Devaluation of the bond: Either due to market conditions or decisions taken by the company the bond's value may fall below par and may not fetch the invested money at the end of the bond period.


Related Solutions

Explain relationship between credit risk and interest risk of corporate bonds( discuss in detail)
Explain relationship between credit risk and interest risk of corporate bonds( discuss in detail)
explain relationship between credit risk and interest risk of corporate bonds( discuss in detail)
explain relationship between credit risk and interest risk of corporate bonds( discuss in detail)
20.1 Explain the importance of credit risk pricing. What are the various factors influencing credit risk...
20.1 Explain the importance of credit risk pricing. What are the various factors influencing credit risk pricing?
"Managing Corporate Earnings" Please respond to the following: Evaluate the environmental factors that contribute to corporate...
"Managing Corporate Earnings" Please respond to the following: Evaluate the environmental factors that contribute to corporate management’s need to manage corporate earnings to align with market expectations, indicating the potential long- term risks to financial performance and sustainability. Assess the ethical complexities related to managing corporate earnings, determining whether or not investors and stakeholders are accepting of this behavior. Assuming that you are in a position to make corporate financial decisions, how likely are you to engage in earnings management...
a higher default risk premium indicates investors expect a              credit risk on the corporate bonds a.lower...
a higher default risk premium indicates investors expect a              credit risk on the corporate bonds a.lower b.higher c.neutral d.not able to determine
Use the market of corporate bonds and government bonds to graphically explain why the credit spread...
Use the market of corporate bonds and government bonds to graphically explain why the credit spread increases when there is a financial crisis.
Explain the risks associated with investing in Corporate Bonds, are they the same risk as for...
Explain the risks associated with investing in Corporate Bonds, are they the same risk as for Government Bonds? Why does a bond’s face or par value differ from its market value? Why is the Required Return such an important concept in finance? Explain the efficient markets hypothesis and why it is important to share prices Describe what is meant by systematic risk and unsystematic risk. How is this distinction related to an investment’s beta? Estimate an investor’s required rate of...
What two factors determine a company’s level of credit risk? Explain what each factor tries to...
What two factors determine a company’s level of credit risk? Explain what each factor tries to measure.
Discuss in detail the factors that contribute to imperfect specialization in international trade.
Discuss in detail the factors that contribute to imperfect specialization in international trade.
What are the leading risk factors that contribute to death and disability in low- and middle-income...
What are the leading risk factors that contribute to death and disability in low- and middle-income countries, and how do they differ from those found in high-income countries?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT