Question

Explain the types of risk there are in Bonds, how do these apply to today's markets, also explain bond ratings, the different types and how these ratings affect pricing and yields of the bonds in use. Find examples of different rating comparable companies and post their yields and risks. Compare and contrast.

Answer 1

There are various types of risk associated with investment into bonds and these are as follows-

A. credit risk is the risk associated with non payment of the principal amount of the bond.

B. Default risk is associated with non payment of the periodic interest rate of the bond.

C. Reinvestment risk will mean that the bond will be redeemed by the issuer before the maturity period and money will have to be invested.

there are various types of risk related to liquidity and solvency of the bonds as well as applicable in today's world as well due to presence of systematic risk.

Bond ratings are ratings assigned to the bonds and they can vary from investment grade bonds to junk grade bonds so they will be having a wide coverage of assignment of rate into various types of Corporate and treasury bonds.

these ratings will be affecting the prices because of investors are reacting on these ratings and there will be various types of rating agencies like Moody along with standard and poor who are constantly rating the bonds like AAs which are mostly investment grade bonds and categories like C and D will be junk bonds.