Fixed Income Risk and Bond Duration.pptx - Fixed Income Risk and Bond Duration FIXED INCOME SECURITY RISK Default risk or credit risk is the possibility

Fixed Income Risk and Bond Duration.pptx - Fixed Income...

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Fixed Income Risk and Bond Duration
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FIXED INCOME SECURITY RISK Default risk , or credit risk, is the possibility that a borrower will be unable to repay principal and interest as agreed upon in the loan document. Reinvestment rate risk refers to the possibility that the cash coupons received will be reinvested at a rate different from the bond’s stated rate. Interest rate risk refers to the chance of loss because of adverse movements in the general level of interest rates.
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INTEREST RATE RISK – MALKIEL’S THEOREMS Malkiel’s theorems are a set of relationships among bond prices, time to maturity, and interest rates. Theorem One : Bond prices move inversely with yields. Theorem Two : Long-term bonds have more volatility (risk). Theorem Three : Higher coupon bonds have less volatility (risk). Theorem Four : The importance of theorem two diminishes with time. Theorem Five : Capital gains from an interest rate decline exceed the capital loss from an equivalent interest rate increase
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  • Spring '09
  • FAREWELL
  • Bond duration, Zero-coupon bond, Fixed income analysis

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