which of the following types of risk affect bonds? course hero

What are the types of risks in bond?

Below is the list of most common types of Risks in Bond that investors should be aware of Inflation Risk Inflation Risk is a situation where the purchasing power drops drastically. It could also be explained as a situation where the prices of goods and services increase more than expected.

What factors affect the value of a bond?

where a slew of factors specific to the bond, as well as the market environment, affect the bond rating, thus decreasing the value and demand of the bond. Different types of bond risks elucidated above almost always decrease the worth of the bond holding.

How does market risk affect the bond market?

Market risk affects the entire market together. In a bond market, no matter how good an investment is, it is bound to lose value when the market declines. Interest rate risk is another form of market risk. Default risk is defined as the bond issuing company’s inability to make required payments.

Why is it important to assess every bond issue for risk?

Proper assessment of every bond issue for the above risks is very important in order to minimize the impact. A new market entrant can be easily duped by an issue that looks good on the face but is marred by so many risks that the eventual payout might not be attractive at all.

Who rated bonds?

How much did Annika pay for Euro bonds?

Is rate of return impacted?

Do bond rating agencies get paid?

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Who rated bonds?

A) Bonds are rated by an agency of the federal government.

How much did Annika pay for Euro bonds?

Annika bought euro denominated bonds when the exchange rate was .909 euro to the dollar. She paid $11,881 for the bonds. At the end of the year, the bonds were worth 10,600 euro; she received 400 euro in interest and the exchange rate was .921 euro to the dollar.

Is rate of return impacted?

D) rate of return is not impacted but the level of risk is lowered.

Do bond rating agencies get paid?

D) Bond rating agencies are paid by investors and receive no compensation from the bonds' issuer.

Which is higher, the market price or the conversion price?

II. the market price of the stock is higher than the conversion price.

Which type of corporation usually has an excessive amount of debt?

II. The issuing corporation usually has an excessive amount of debt.

How much did Annika pay for Euro bonds?

Annika bought euro denominated bonds when the exchange rate was .909 euro to the dollar. She paid $11,881 for the bonds. At the end of the year, the bonds were worth 10,600 euro; she received 400 euro in interest and the exchange rate was .921 euro to the dollar. What was her holding period return in U.S. dollars?

Is municipal bond income taxed?

Interest income on a municipal bond is usually exempt from state and local income taxes if the bond is issued by the state or locality in which the investor resides.

Do you have to pay taxes on a bond?

Unless the bond is held in a tax-sheltered account, the investor must pay taxes on the annual accrued interest even though no interest is actually received.

Do junk bonds have a greater impact on the price and yield of investment grade bonds than on investment grade bonds?

I. They have a greater impact on the price and yield of junk bonds than on investment grade bonds

Why avoid too much dependency on a particular type of bond?

Avoiding too much dependency on a particular type of bond can help mitigate these risks to some extent. Some debt instruments. Debt Instruments Debt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time.

What is reinvestment risk?

Reinvestment Risk Reinvestment risk refers to the possibility of failing to induce the profits earned or cash flows into the same scheme, financial product or investment. It even states the uncertainty of not getting the similar returns when such funds are invested in a new investment opportunity. read more

What is the probability that investors will not be able to reinvest the cash flows at a rate comparable to?

The probability that investors will not be able to reinvest the cash flows at a rate comparable to the bond’s current return refers to reinvestment risk. This tends to happen when market rates are lower than the bond’s coupon rate. Say, a $100 bond’s coupon rate.

What is call protection on a bond?

The call protection feature also protects the bond from being called for a particular time period giving investors some relief.

What is interest rate risk?

Interest rate risk refers to the impact of the movement in interest rates on bond returns. As rates rise, bond price declines. In the event of rising rates, the attractiveness of existing bonds with lower returns declines, and hence the price of such bond falls. The reverse is also true. Short-term bonds are less exposed to this risk, while long term bonds have a very high probability of getting affected.

What is default risk?

Default risk is defined as the bond issuing company’s inability to make required payments. Default risk is seen as other variants of credit risk where the borrowing company fails to meet the agreed terms of the issue.

Why is it important to understand the advantages of risks?

Although the term advantages of risks is an oxymoron, it is very important to understand that it is the risks only that warn investors beforehand so that they can diversify their portfolios and be aware of what is coming. This not only prevents severe market unrest but also creates an efficient market.

Who rated bonds?

A) Bonds are rated by an agency of the federal government.

How much did Annika pay for Euro bonds?

Annika bought euro denominated bonds when the exchange rate was .909 euro to the dollar. She paid $11,881 for the bonds. At the end of the year, the bonds were worth 10,600 euro; she received 400 euro in interest and the exchange rate was .921 euro to the dollar.

Is rate of return impacted?

D) rate of return is not impacted but the level of risk is lowered.

Do bond rating agencies get paid?

D) Bond rating agencies are paid by investors and receive no compensation from the bonds' issuer.