Risks Associated With Investing In Bonds Flashcards

1
Q

Interest rate risk

A

When the price of a bond held in a portfolio declines because of the rise in market interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Reason for an inverse relationship between changes in interest rates and bond prices

A

If interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Corporate rate less than yield required by market

A

price less than par value
Par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Corporate rate greater than yield required by market

A

Price is greater than par value
premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Impact of maturity

A

The longer the bonds maturity, the greater the bond’s price sensitivity to changes in interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Impact of coupon rate

A

The lower the coupon rate, the greater the bond’s price sensitivity to changes in interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Impact of embedded options

A

Change depending on how the value of the embedded options changes when interest rate changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Embedded call option

A

A benefit to the issuer and a disadvantage to the bondholder
subtracted from the option free Bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Option free Bond

A

Once the embedded call option is deducted, it increases when interest rates decline

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Duration

A

A measure of the price sensitivity of a bond to a change in yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Yield Curve risk

A

Affect the price sensitivity of a portfolio of bonds
an adverse shift in market interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Impact of yield level

A

The higher the bond yield, the lower the price sensitivity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Measuring interest rate risk

A

Percentage price change from initial price
dollar price change from initial price change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Rate shock

A

Change in yield basis points

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Call risk

A

The risk for a bond buyer that exists in purchasing a callable bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Prepayment risk

A

The risk involved with the premature return of principal on a fixed income security

17
Q

Reinvestment risk

A

The possibility that an investor will be unable to reinvest cash flows received from an investment

18
Q

Types of credit risks

A

Default risk
credit spread risk
downgrade risk

19
Q

Default risk

A

The risk that an issuer will fail to satisfy the terms of the obligation with respect to timely payments

20
Q

Credit spread rate

A

The risks that an issuers debt obligation would decline due to an increase in credit spread

21
Q

Rating agency

A

A tool investors used to gauge the default risk of an issue is the credit ratings assigned to issues by rating company

22
Q

Downgrade

A

A deterioration in the credit rating of an issue is penalized by the inferior credit rating

23
Q

Upgrade

A

Improvement in the credit quality of an issue is rewarded with a better credit rating

24
Q

Liquidity risk

A

The risk that the Investor will have to sell a bond below its indicated value

25
Q

Currency risk

A

The risk of receiving less of the domestic currency when investing in a bond that makes payment in another currency

26
Q

Inflation risk

A

Arises from the decline in the value of the security cash flow

27
Q

Volatility risk

A

The risk that at the price of a bond with an embedded option will decline when a yield volatility changes

28
Q

Volatility risk on options

A

Callable bonds: increase an expected yield volatility
Putable bonds: decrease in expected yield volatility

29
Q

Event risk

A

Natural disaster
take over/corporate restructuring
regulatory change

30
Q

Forms of sovereign risk

A

Unwillingness of the government to pay
inability to pay due to unfavorable economic conditions

31
Q

What causes credit spread to widen

A

Worsening credit cycle
Weak macroeconomic climate
Decline in financial climate
Lack of market makers (brokers-dealers)
Insufficient demand for bond issue
Credit downgrades
Falling liquidity