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

What is the difference between 'business risk' and 'financial risk'? What is meant by financial leverage?

4. How do you define and measure financial risk? Discuss the relationship between risk and return...

4. How do you define and measure financial risk? Discuss the relationship between risk and return when it comes to building an investment portfolio. Provide examples of how you would modify a portfolio to best fit an investor’s individual risk profile.

Define and discuss Web Site Security and also Define and discuss Web Application Security.

What is the Central Limit Theorem? Discuss an example of its application. What is meant by...

What is the Central Limit Theorem? Discuss an example of its application. What is meant by sampling distribution of the sample proportion? What are confidence intervals? How do you construct confidence intervals?

Define financial institutions, financial services industry and risk management.

Define Inherent Risk and Control Risk, and discuss the relationship between these risks and audit risk...

Define Inherent Risk and Control Risk, and discuss the relationship between these risks and audit risk .

Please define and explain leverage, business risk, sales risk, operating risk, and financial risk, and classify...

Please define and explain leverage, business risk, sales risk, operating risk, and financial risk, and classify risk.

Define what is meant by an investment portfolio. List and discuss key questions to answer and...

Define what is meant by an investment portfolio. List and discuss key questions to answer and list asset classes and sub-asset classes that could be candidates for inclusion in a portfolio; what are those asset and sub-asset classes.what are those key determinants for all asset classes and sub-asset classes I need to Understand This topic!!!

Define the application of the folllowing in terms of risk management in banks: ratings-based approach equity...

Define the application of the folllowing in terms of risk management in banks: ratings-based approach equity based approach better credit portfolios scenario analysis

QUESTION 16 Define liquidity risk and explain how it relates to bonds and bond yields. Define...

QUESTION 16 Define liquidity risk and explain how it relates to bonds and bond yields. Define default risk and explain how it relate to bonds and bond yields.

Question