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13.7. Risks In Bond Investment

The major risks to bond investors are listed below:

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1. Interest rate risk.

2. Call and prepayment risk.

3. Yield curve risk.

4. Reinvestment risk.

5. Credit risk.

  1. default risk
  2. credit spread risk
  3. downgrade risk

6. Liquidity risk.

7. Exchange rate risk (currency risk)

8. Volatility risk.

9. Inflation risk.

10. Event risk.

  1. natural catastrophe risk
  2. corporate restructuring risk
  3. regulatory change risk
  4. political change risk

The inverse relationship that exists between changes in interest rates and bond prices is best explained mathematically in the subsequently. However the following example will explain it descriptively:

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