Description
Assume that someone asks you for some advice on investing in bonds. You are fully aware of the five risk categories explained in Chapter 10. Assume that the person asking for advice would like to know your opinion on which risk is the one in which to be most cautious. Which risk is it and why? Furthermore, explain how an investor could potentially mitigate his risk.
Explanation & Answer
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- Risks associated with Bonds Credit Risk - The risk that a bond's issuer will go into default before a bond reaches maturity. Market Risk - The risk that a bond's value will fluctuate with changing market conditions. Interest Rate Risk - The risk that a bond's price will fall with rising interest rates. Inflation Risk - The risk that a bond's total return will not outpace inflation. Re-investment Risk-The risk that the proceeds from a bond will be reinvested at a lower rate than the bond originally provided.
Mitigation of the Risk
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