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Types of risks faced by investors in bonds

Briefly describe the types of risks faced by investors in domestic bonds?

Also indicate the additonal risks associated with nondomestic bonds.

Explain the differece between Stocks and Bonds and which one Corporations use most to raise capital.

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What is risk?

Risk is the uncertainty that you may not earn your expected return on your investments. For example, you may expect to earn 20% on your stock mutual fund every year. But your actual rate of return may be much lower.

For example, the S&P 500 index averaged yearly gains of about 20% for the five years that ended in 1999. In 2000, however, the index declined more than 9%. Bonds, meanwhile, performed better than stocks for the first since 1994.

What are different types of risk in domestic bonds?
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with fixed rate of interest on a specified date, called as the maturity date. Other fixed income instruments include bank fixed deposits, debentures, preference shares etc.

Major types of risk include:
Investment risk. Investment risk is the chance that your investment value will fall. Standard deviation is commonly used to measure investment risk. It shows a stock or bond's volatility, or the tendency of its price to move up and down from its average. As standard deviation increases, so does investment risk.
Market risk. Market risk is the chance that the entire market where your investment trades will fall in value. Market risk cannot be diversified. Securities are exposed to market risk including recessions, wars, structural changes in the economy, tax law changes, even changes in consumer preferences. Market risk is sometimes used synonymously with systematic risk.

Interest rate risk. Interest rate risk is the chance that interest rates will change while you hold an investment. Higher rates result in lower returns on stocks and bonds, but higher returns on ...

Solution Summary

This discusses the types of risks faced by investors in bonds