diciuss the risks that investors face when buying bonds?

Solutions

Expert Solution

Following are the few risk associated with investing in Bonds

1. Interest rate Risk

2. Credit Risk

3. Reinvestment Risk

4. Price Risk

5. Inflation Risk

Interest rate Risk

This risk happens when there is a change in interest rate. Interest rate and price of the bond are inversely related. Rising interest rates will result in falling bond prices and fall in interest rate will result in rise in bond price.

Credit Risk

This a risk associated with default in payment of coupon and final redemption piece by the person who issued those bonds. For corporate bonds credit risk will be higher as compared to government bonds.

Reinvestment Risk

Risk that when interest rate is falling and investor may have to invest the coupon or redemption or sale price of bond at a lower interest rate.

Price Risk

Risk that price of the bond falls during the life of the bond.

Inflation Risk

Inflation will reduce the purchasing power of money, which will undermine the return form the bond. This risk is also called as purchasing power risk.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

David raised working capital from local investors by issuing bonds. The bonds, which have a face...

David raised working capital from local investors by issuing bonds. The bonds, which have a face value of $40,000, were sold on July 1st, 2018. They have a coupon rate of 7.40 percent and pay interest monthly for three years with the first payment due on August 1st, 2018. The last payment, which includes repayment of principal, is July 1st, 2021. David’s investors agreed on an issue price of 106. Required: Prepare journal entries to record all transactions and adjustments...

Buying Insurance is similar to A- SELLING RISKS B- IRRATIONALLY AVOIDING LIFE RISKS C BUYING RISK...

Buying Insurance is similar to A- SELLING RISKS B- IRRATIONALLY AVOIDING LIFE RISKS C BUYING RISK D BEING A FREE RIDER E eliminating risks

The University of Alaska sells three-year bonds with an $800,000 face value to private investors. The...

The University of Alaska sells three-year bonds with an $800,000 face value to private investors. The bonds are due in three years, have an 8% coupon rate and interest is paid annually. The bonds were sold to yield 6%. What proceeds does UA receive from the investor Did the bond sell for par, a premium or a discount? How much was the premium or discount? If the bond sold for a premium or discount, what is the balance in the...

You are well aware of the risks that you face when you buy shares in a...

You are well aware of the risks that you face when you buy shares in a company that has shares with different voting rights. Assume that you have no choice but to buy non-voting shares in a company that has both voting and non-voting shares. Which of the following would you view as least dangerous to you (from a corporate governance standpoint)? A. Voting shares are not traded and held entirely by CEO B. Voting shares are traded, but concentrated...

Carry trade can be divided into two stages the buying part is when investors purchase lower...

Carry trade can be divided into two stages the buying part is when investors purchase lower interest rates currency and leverage them to purchase higher value currency. The second stage of trading happens on a level of products and service where the investors will leverage local organizations to produce the products and services at a lower cost. Generally, when interest rates of a certain currency decrease does it usually affects the economy of the country as well.

Firms that face higher costs of reducing risks will have _______ isoprofit curves when compared to...

Firms that face higher costs of reducing risks will have _______ isoprofit curves when compared to firms that can reduce risk at a lower cost. A. flatter B. thinner C. thicker D. steeper Producer surplus from hiring labor will increase when: A. the MP of labor declines. B. the price of the product declines. C. the wage rate declines D. market labor supply falls. Producer surplus from hiring labor will increase when: A. the MP of labor declines. B. the...

Investors can encounter a conflict of interest for credit rating agencies (CRA) when buying debt securities.

a) Explain the possible reasons for causing such conflicts and the circumstances in that conflicts of interest for CRAs are most likely to happen.b) If a conflict of interest for CRAs exists in the financial market, provide some possible ways to mitigate such conflicts.

Question