InvestorQ : Can you throw some light on the various types of risks with regard to debt securities that an investor is exposed to?
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Can you throw some light on the various types of risks with regard to debt securities that an investor is exposed to?

Answer
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1 year ago


Some of the key risks associated with bonds and debt securities include:

Default Risk: This can be defined as the risk that an issuer of a bond may be unable to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture and is also referred to as credit risk.

Interest Rate Risk: can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market so as to affect the yield on the existing instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a situation where the investors' money is locked at lower rates whereas if he had waited and invested in the changed interest rate scenario, he would have earned more.

Reinvestment Rate Risk: can be defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market.

In addition to some of the risks that are inherent to debt as an investment instrument, there is some risk that associated with

The following are the risks associated with trading in debt securities:

Counter Party Risk: is the normal risk associated with any transaction and refers to the failure or inability of the opposite party to the contract to deliver either the promised security or the sale-value at the time of settlement.

Price Risk: refers to the possibility of not being able to receive the expected price on any order due to an adverse movement in the prices.