Define and discuss is meant by risk with special application to bond financial assets.

Expert Solution

When there is an uncertainty associated with a financial asset, it can lead to a risk of losing the capital invested and interest earned on the asset. Risks associated with bonds are-

i) Issuer risk- The issuer of the bond that has an obligation to pay back the investor may be unable to pay back its obligations.

ii) Interest Rate Risk-Bond prices are inversely related to interest rates. An increase in interest rate might lead to a reduction in market value of the bond. The risk is higher when the maturity of the bond is long.

iii) Call Risk- In some cases the issuer may call the bond before its maturity date. It may affect the expected yield of the bond,if the interest rate is lowered.

iv) Risk associated with di erent types of bonds - Risk associated with the investment in the type of bond.

v) Liquidity Risk-It cannot be traded before the maturity date

Other risks include volatility risk, exchange rate risk,reinvestment risk and yield curve risk.

Rahul Sunny answered 2 years ago

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