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  • Fixed Income Risks

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    osiccor
    15 Ansichten15 Seiten
    This document outlines the various risks associated with investing in fixed-income securities. It discusses two components of return - change in market value and cash flows received. It then describes several types of risks in detail, including interest rate risk, reinvestment risk, timing/call risk, credit risk, yield curve/maturity risk, inflation risk, liquidity risk, exchange rate risk, volatility risk, and political/legal risk. These risks can impact the value and returns of fixed-income investments.

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    Actsc 445 (UW)

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    This document outlines the various risks associated with investing in fixed-income securities. It discusses two components of return - change in market value and cash flows received. It then describes several types of risks in detail, including interest rate risk, reinvestment risk, timing/call risk, credit risk, yield curve/maturity risk, inflation risk, liquidity risk, exchange rate risk, volatility risk, and political/legal risk. These risks can impact the value and returns of fixed-income investments.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Als PDF, TXT herunterladen oder online auf Scribd lesen
    Markieren Sie unangemessene Inhalte
    15 Ansichten15 Seiten

    Fixed Income Risks

    Hochgeladen von

    osiccor
    This document outlines the various risks associated with investing in fixed-income securities. It discusses two components of return - change in market value and cash flows received. It then describes several types of risks in detail, including interest rate risk, reinvestment risk, timing/call risk, credit risk, yield curve/maturity risk, inflation risk, liquidity risk, exchange rate risk, volatility risk, and political/legal risk. These risks can impact the value and returns of fixed-income investments.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Als PDF, TXT herunterladen oder online auf Scribd lesen
    Markieren Sie unangemessene Inhalte
    von 15

    RisksAssociatedwithFixed IncomeSecuri8es

    ReturnComponents
    Returnobtainedfrominves8nginaxed incomesecurityfromthedayitispurchased tothedayitissoldhastwocomponents:
    Changeinmarketvalue Cashowsreceivedfromthesecurityduringthe 8meitisheld,plusaddi8onalincomefrom reinvestmentofthesecashows

    RisksAssociatedwithFixedIncome Investments
    Market,orinterestraterisk Reinvestmentrisk Timing,orcall,risk Credit,ordefault,risk Yieldcurve,ormaturity,risk Ina8on,orpurchasingpower,risk Liquidityrisk Exchangerate,orcurrency,risk Vola8lityrisk Poli8calorlegalrisk

    InterestRateRisk
    Mostimportantriskformostxedincome investors. Usually,thevalueofaxedincomesecurity decreasesasinterestratesrise. Sellingwhenrateshaverisenwillresultinaloss. Thereareexcep8ons(e.g.putop8ons). Domes8ctreasuryyieldcurveismostcommon benchmarkformeasuringratechanges.

    ReinvestmentRisk
    Returnearnedwhenreinves8ngthecash owsofaxedincomesecuritydependson theprevailingmarketrateswhenthosecash owsarereceived. Theriskisthatrateswillbelowwhencash owsbecomeavailableforreinvestment.

    Timing/CallRisk
    Ifthexedincomesecurityhasacall provision,thecashowsreceivedare uncertain. Callfeaturesexacerbaterevinvestmentrisk:
    Bondswilltendtobecalledwheninterestrates arelow(issuercangetcheaperfundingby renancing).

    Aversionofthisriskistheprepaymentriskof mortgagebackedsecuri8es.

    CreditRisk
    Riskduetoachangeinthecreditworthiness oftheissuer. Defaultrisk
    Recoveryrisk

    Migra8onrisk Spreadrisk(oTenconsideredapartofmarket risk).

    TreasuryEurodollarSpread(TEDSpread)

    Source:Wikipedia

    YieldCurve/MaturityRisk
    Theyieldcurvereferstothecurrentmarket informa8ongivingtheyieldtomaturityforbonds ofdierentdura8ons. Itcanbeusedtomakeassump8onsaboutthe futurebehaviourofinterestrates. Investmentdecisionsmaybemadebasedona par8cularassump8ononthebehaviourofthe yieldcurve.
    Theobtainedreturnwillbeaectedbydevia8onsof actualinterestratesthatprevailinthefuturefrom thoseinferredfromthecurrentyieldcurve.

    Ina8onRisk
    Ina8onaectsthevalueoffuturecashows, whenmeasuredintermsofpurchasingpower. Unlessthebondisina8onlinked,theholder hasanexposuretothisrisk.

    LiquidityRisk
    Flighttoqualityscenarios
    Investorsrushtothesafestpossiblesecuri8es (e.g.U.S.treasuries) Pricesofallothersecuri8esdropdrama8cally E.g.AugustSeptember1998,September2008

    Wideningbidaskspreads(highertransac8ons costsduetolowerliquidity). Fundingliquidityrisk(illiquidvs.insolvent).

    ExchangeRateRisk
    Receivingcashows(e.g.fromholdinga bond)inacurrencyotherthanthedomes8c currencyexposesaninvestortoexchangerate risk. Holdingbondsissuedinanothercountryalso exposesaninvestortotheinterestraterisk fromthatcountry.

    Vola8lityRisk
    Interestratevola8lityaectsthevalueof op8onsembeddedinbonds(e.g.callable, putablebonds,prepaymentop8ons embeddedinmortgagebackedsecuri8es). Thevalueoftheseop8onsincreaseswith increasingratevola8lity. Iftheseop8onsaregrantedtotheissuer(asin callablebonds,MBS)thepriceofthesecurity willdecreasewhenvola8lityincreases.

    Poli8cal/LegalRisk
    Taxpolicy Abilitytoenforcebondcovenants Legalstatusofthedebt(e.g.within bankruptcy,restructuring)

    EventandSectorRisk
    EventRisk:Theabilityofanissuertomeetits obliga8onsmightbeaectedbyaseriousand unexpectedchangeduetoasuddenevent.
    Naturalorindustrialaccident Takeoverorcorporaterestructuring

    SectorRisk:Riskduetothepossibilityof adversedieren8almovementsofspecic sectorsofthemarket.

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