Question

What is the default risk for a bond? Explain carefully why this risk arises for a bond.

Answer 1

Default risk bond occurs when the company fail to repay its debt obligation and interest payment.There are many factors leads to default risk for bonds. The economy, componies position, Flow of funds are some reason for this risk. So here sometimes government may fail to issue bonds and these will make a risk. companies can avoid these kind of default risk for bonds by proper debt payment and proper utlisation of funds. And we should also consider the bond rating. This means how well a bond perform. We should consider this point by analysing the proper bond features. This will helps to make good repayment on the bond. We can analyse and mitigate this risk by looking the interest coverage ratio. If the interest ratio is high then the chance of default will be less. And by looking this we are able to mitigate this kind of risk. Bonds are generally contain less risk but it too have risk and this is because interest changes and some adverse economical, political and enviorrnmental reasons.

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