Question

What are the risks associated with owning a bond and What happens in stock market and bond market when interest rates rise?

Answer 1

Risks associated with bonds are
1. Default Risk : There is a chance that issuer might not be able to pay coupon or face value at end of maturity due to business problems. This might cause loss of money. This is default risk.
2. Interest Risk: If the interest rises then the bond price falls and the buyer of the bond will be at loss if it sells before maturity. If the interest rate falls then selling it at maturity might be at loss as price of bond will be highr.
3. Inflation risk: Higher inflation deceases the real return of the bond. The longer the duration of bond higher the inflation risk.
4. Market Risk: There is a chnace that the interest rate and bond prices are affect by the economic conditions of the country.

When interest rate rises stock market falls because the loan rate and bond rates will be higher leading to low capital expenditure.
Increase in interest rate decreases the bond price as discounting factor of coupon and par value increases.

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