According to the lecture, the bond is fixed but has uncertainties. Could you explain this contradiction?

Solutions

Expert Solution

1- Bonds are generally of long term maturities ranging 5-30 years hence they carry the risk of uncertainty that is, credit risk, probability of default in future.

2- Change in market yield can cause a change in the price of bond i.e increase in yield decrease the price of bond , vice versa.

3-Rating related risk as if Rating decrease than bond will be discounted with higher rate hence decrease the price of the bond.

4-Economic condition of the country or the particular sector also decides the spread on bond with which it would be discounted resulting in the change of price of a bond. for eg. increase in spread due to depression in particular sector would increase the discounting rate due to which there will be decrease in the price of bond .

Hence we can say that bond is fixed but have uncertainty of default or risk related to change in price because of following above reason.

jeff jeffy answered 1 year ago

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