Fixed Income Securities Ch2

Front 1

market risk (interest-rate risk)

Back 1

ifor an investor who sell fixed income security before the maturity date, increase in interest rate will result in realization of a capital loss.

Front 2

duration

Back 2

percentage change in the price of a bond due to 100 basis point change in yields.

Front 3

reinvestment risk

Back 3

variability in the returns from reinvestment from a given strategy due to change in market rate.

Front 4

interest rate risk vs. reinvestment risk

Back 4

interest rate risk = risk that interest rates will rise.

reinvestment risk = risk that interest rate will fall.

Front 5

timing or call risk

Back 5

risk associated with call provision:
1. cash flow pattern is not known
2. exposed to reinvestment risk
3. capital appreciation potential will be reduced.

Front 6

credit risk (default risk)

Back 6

risk that the issuer of a fixed income security may default.

Front 7

yield curve (maturity risk)

Back 7

adjustment made to account for differential interest-rate risks in the two hedged bonds.

Front 8

liquidity risk

Back 8

risk that investor will have to sell a bond below its true value where true value is indicated by a recent transaction.