FixedIncomeRisks

Timingcallrisk ifthexedincomesecurityhasacall

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Unformatted text preview: •  Usually,
the
value
of
a
fixed
income
security
 decreases
as
interest
rates
rise.
 •  Selling
when
rates
have
risen
will
result
in
a
loss.
 •  There
are
excep8ons
(e.g.
put
op8ons).
 •  Domes8c
treasury
yield
curve
is
most
common
 benchmark
for
measuring
rate
changes.
 Reinvestment
Risk
 •  Return
earned
when
reinves8ng
the
cash
 flows
of
a
fixed
income
security
depends
on
 the
prevailing
market
rates
when
those
cash
 flows
are
received.
 •  The
risk
is
that
rates
will
be
low
when
cash
 flows
become
available
for
reinvestment.

 Timing/Call
Risk
 •  If
the
fixed
income
security
has
a
call
 provision,
the
cash
flows
received
are
 uncertain.
 •  Call
features
exacerbate
revinvestment
risk:
 –  Bonds
will
tend
to
be
called
when
interest
rates
 are
low
(issuer
can
get
c...
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