• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Key Risks Associated with Investing in Bonds

CFA® Exam Level 1, Fixed Income Securities

This lesson is part 1 of 17 in the course Risks of Investing in Bonds

Bonds are a lucrative investment class for investors and portfolio managers. However, just like any other investment, investing in bonds also has many risks associated with it. This article lists the key risks:

Interest Rate Risk: Bond prices are inversely related to interest rates. When interest rates rise, bond prices fall and vice versa.

Call and Prepayment Risk: Bonds can have embedded options such as an embedded call in which case the bond may be called back before maturity. Bonds may have prepayment risk, in cases where the underlying cash flow is backed by a loan pool.

Yield Curve Risk: The term structure of interest rates, or yield curve, may change causing the value of bond portfolio to change.

Reinvestment Risk: The yield-to-maturity (YTM) assumes that you will be able to reinvest the intermediate cash flows at the same yield. This may not always be possible and the investor may not realize the YTM.

Credit Risk: The investor is also exposed to credit risk in the form of default risk, credit spread risk, and downgrade risk.

Liquidity Risk: This is the risk that the investor may have to sell the bond at a price lower than the expected price. This is measured using bid-ask spread.

Exchange-rate Risk: Bonds with cash flows in foreign currency will add foreign exchange risk to the bond portfolio.

Volatility Risk: The higher is the expected yield volatility, the higher is the price of the bond.

Inflation Risk: The increase in inflation may wipe out the profits from the bond.

Event Risk: At times, the issuer may not be able to make the interest and principal payments on time due to events such as natural disasters, merger/acquisition, or a change in regulation. Such events collectively refer to event risk.

Sovereign Risk: Bonds issued by foreign entities also pose sovereign risk. The risk is that some action of the foreign government affects the bonds price or cash flows.

In the following articles, we will look at all these risks faced by a bond investor in detail.

Previous Lesson

‹

Next Lesson

Understanding Inverse Price/Yield Relationship in Bonds ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • Key Risks Associated with Investing in Bonds
  • Understanding Inverse Price/Yield Relationship in Bonds
  • Bond Features Affecting Interest Rate Risk
  • Impact of Yield Level on Bond’s Price Sensitivity
  • Price of a Callable Bond
  • Interest Rate Risk of Floating-rate Bonds
  • Bond Duration and Convexity Simplified – Part 1 of 2
  • Bond Duration and Convexity Simplified – Part 2 of 2
  • Yield Curve Risk
  • Call and Prepayment Risk
  • Reinvestment Risk in Bonds
  • Credit Risk in Bonds
  • Liquidity Risk in Bonds
  • Exchange Rate Risk in Bonds
  • Inflation Risk in Bonds
  • Volatility Risk in Bonds with Embedded Options
  • Event Risk and Sovereign Risk in Bonds

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us