The debt market features the usual risks associated with financial securities like:

Credit risk: While corporate papers carry credit risk due to changing business conditions, government securities are perceived to have zero credit risk. Credit Risk is the risk that the issuer will not pay the coupon income and/ or the maturity amount on the specified dates. Credit Ratings have been established by rating agencies to reflect their opinion of an issuer’s ability and willingness to do so.

Interest rate risk: Interest rate risk is present in all debt securities and depends on a variety of macroeconomic factors. Interest Rate Risk is the risk that interest rates may rise, causing a fall in value of traded debt instruments.

Settlement risk: The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement is called settlement risk. All debt securities are settled within the specified duration, excepting special cases like death of the holder, etc, in which case it may be delayed till all the required formalities are completed.

Liquidity risk: The risk arising from the lack of possibility to either buy or sell a security quickly as per one’s requirement is called liquidity risk. Debt securities have minimum liquidity risk and can be easily bought and sold after due listing.