3 Risks Associated with Investing in Fixed Income Securities

3 Risks Associated with Investing in Fixed Income...

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Unformatted text preview: ACTSC 445: Asset-Liability Management Department of Statistics and Actuarial Science, University of Waterloo Unit 3 – Risks associated with investing in fixed income securities References (recommended readings): Chap. 2 of Fabozzi et al. When investing in a FIS, the return on the investment depends on different factors, and comes from two different parts: 1. The market value of the security when it is sold (if sold before maturity). 2. The cash flows received from the security over the time period that it is held , plus any additional income from reinvestment of the cash flow. These two potential sources of return are exposed to several risks, which we now discuss. Market, or interest-rate risk Typically, the value of a FIS decreases as interest rates increase. Thus, for the owner of a FIS who needs to sell when interest rates on the market are rising, a loss occurs. This risk is the market risk, and is the most important one for investors in the FIS market. The benchmark used to monitor changes in interest rates is usually the yield level on Treasury securities....
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3 Risks Associated with Investing in Fixed Income...

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