2. Explain the different type of risk that a bond investor and issuer face. How does...

2. Explain the different type of risk that a bond investor and issuer face. How does a bond's term and collateral changed to affect its interest rate?

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Expert Solution

Bond investor and Issuer will be facing-

A. Credit risk is faced by most of the bondholders and it is risk that payment related to principal will not be made by the bond issuer, because of his lack of debt repayment ability.

B. Default risk is another risk that is related to lack of payment of interest by Bond issuer to the bond holder.

C. Reinvestment risk is a risk which is faced by Bond holder because of call option embedded with the bond as this bond will be reinvested at market rate.

D. Prepayment risk is another is which is faced in regards to Bond that payment will be made before the maturity period.

Bond maturity and collateral will be change in order to affect the interest rate as when there would be a higher Bond maturity there would be a lower rate of interest and when there would be a collateral associated with the bond, it will also mean that the bond will be issued at a lower price.

jeff jeffy answered 1 year ago

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