Question

In reference to shares, explain the difference between market risk and specific risk.

In reference to bonds, explain the difference between the dirty price of a bond and the clean price of a bond.

Answer 1

Market risk is also called systematic risk , affects the market as a whole and hence cannot be diversified, ie unavoidable , if one invests in many different types of securities. For example, inflation in the economy or political climate are all market risks , that cannot be avoided , but need to be faced.

whereas,

Specific risks, as the name suggests , are specific to some industries alone , so that they can be avoided by diversifying your investment portfolio , by investing in un-affected industries' securities. Thay are also called unsystematic risks.A strike in one particular industry or company will affect that particular company only and hence can be avoided , till things sort out.

Dirty price of a bond is its price including interest accrued since the last coupon payment date, ie. Price in between two coupon dates,including interest.

whereas,

Clean price is without accrued interest,just the bond price.

Clean price does not take into account the accrued interest, since the last coupon-payment date. It is calculated as the sum of the   present value of all the future coupon cash flows and the face value to be received at its maturity--- but without any interest earned on the bond between the last coupon date and the settlement date.

In other words,

Clean price= Dirty price-Interest accrued