Give a brief answer to these questions. 1) Discuss how bonds can assist an investor to...

Give a brief answer to these questions.

1) Discuss how bonds can assist an investor to accomplish a variety of investment goals.

2) List the types of risks inherent in investing in bonds.

Solutions

Expert Solution

Bonds are debt securities in which the issue of the bond makes a promise to make periodic payments and also promises to repay the principal value at maturity. An investor receive fixed payments if we invest in a bond. An investor can also fulfill his goal of capital appreciation since bonds result in capital gains depending on changes in the market interest rates. Bonds also provide diversification benefits to an investor and reduce the overall volatility of an investor's portfolio.

The risks of investing in bonds are as follows.

1. Interest rate risk. The price of a bond Falls when the interest rates increase and vice versa.

2. Inflation risk. Since the income received from a bond is fixed there is a risk that the return on the bond is unable to keep pace with inflation. The principal received on maturity would be worthless in the present value in that scenario.

3. Market risk. Investing in a bond careers market risk which refers to the risk that the entire bond market declines.

4. Default risk. This is the risk to an investor that the issue of the bond may default in payment.

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