Topic: Fixed Income Securities

Credit Risk in Bonds

The investors in a bond issue also face credit risk as they are actually lending money to the issuer. The credit risk can arise in three forms, namely, default risk, credit spread risk, and downgrade risk. Let’s look at each of them in detail. Default Risk This is the...

Reinvestment Risk in Bonds

Investors in fixed income securities, such as bonds, face reinvestment risk. The risk arises from the fact that the investor may have to invest the interim cash flows from the bonds at a lower interest rate than what he earns from the security. For example, if the...

Call and Prepayment Risk

A bond may have a call provision that allow the issuer to call the bond back before its maturity date. Since a call feature is a benefit to the issuer, its value is lower than a similar plain vanilla bond. The call provision brings three key disadvantages to the...

Price of a Callable Bond

The debt securities issued in the market can have many features; one such feature is an embedded option such as a call option. The call option gives the issuer the right to but the bond back from the investor at prespecified terms after a certain period. Similarly,...

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