Types of risk: Interest rate risk, yield curve risks, call risk, prepayment risk, reinvestment risk, credit risk, liquidity risk, exchange rate risk, inflation risk, volatility risk, event risk, soverign risk.
Interest rate risk - Duration. Amount of change on price by change in yield. The higher the amount of time for investment horizon, and the smaller the yield means higher interest rate risk. Lower yield, means higher price. change in yield means bigger variation of price change compared to an initially higher yield security.
yield curve risks - Possibilliyt of changes in shape of hyield curve.
call risk- risk that security may be called when rates drop, and investor can reinvest at lower rate.
prepayment risk - chance that rates drop and investor wants to payback entire principal of loan, for amortizing .
reinvestment risk - risk of when market rates fall, and call/prepayment provision activiated, must reinvest at a lower rate. (Zero coupon does not have reinvestment.
credit risk - Risk that issuer may default
liquidity risk - risk of immediatley selling the security and taking a lower price bc of tough to sell non liquid security.
exchange rate risk - risk apparent when investing in securities of differnt country and interest rates might move against you. If home currency appreciates, the investment is worth less.
Inflation risk - Unexpected inflation/ change in purcahsing power.
- volatility risk - Present for fixed income securities that HAVE EMBEDDED options. Risk that changes in interest rate volatility will change price of security.
- event risk - Risk outside risk of finacial markets, such as risks posed by natural disaster and corporate takeover.
- soverign risk - Risk that a soverign bond of a country, when country defaults.