| The return obtained from a fixed income security from | | | | will mean the realization of a capital loss. This risk is |
| the day it is purchased to the day it is sold can be | | | | referred to as market risk or interest rate which is by |
| divided into two parts, | | | | far the biggest risk faceted by an investor in the fixed |
| 1. The market value of the security when its even | | | | income market. |
| actually sold. | | | | It is customary to represent the market by the |
| 2. The cash flows received from the security over the | | | | yield levels on treasury securities. Most other yields are |
| time period that it is held. Plus any additional income | | | | compared to the treasury levels and are quoted as |
| from reinvestment of the cash flow. | | | | spreads off appropriate treasury yields. To the |
| Several environmental factors affect one or both of | | | | extended that the yields of all fixed income securities |
| these two parts. We can define the risk in any security | | | | are interrelated there prices respond to changes in |
| as a measure of these market factors on the return | | | | treasury rates. |
| characteristics of the security. | | | | The actual magnitude of the price response for |
| The different types of risk that in fixed income | | | | any security depends on various characteristics of the |
| securities is exposed to are as follows | | | | security such as coupon, maturity and the options |
| Market or Interest-rate risk | | | | embedded into the security. |
| Reinvestment | | | | Reinvestment Risk |
| Timing or Call | | | | The cash flows received from a security are |
| Yield-curve maturity | | | | usually (or are assumed tube) reinvested. The |
| Inflation or Purchasing power | | | | additional income from such reinvestment, sometimes |
| Marketability or Liquidity | | | | called interest on interest, depends on the prevailing |
| Exchange rate or Currency | | | | interest rate levels at the time of reinvestment as well |
| Volatility | | | | as on there reinvestment strategy. The variability in the |
| Political or Legal | | | | returns from reinvestment from a given strategy due |
| Event | | | | to changes in market rates in called reinvestment risk. |
| Sector | | | | The risk here is that the interest rate at which |
| Market or Interest rate | | | | interim cash flows can be reinvestment will fall. |
| The price of typical fixed income security moves in | | | | Reinvestment risk is greater for longer holding periods.It |
| the opposite direction of the change in interest. As rate | | | | is also grater for securities with large, early cash flows |
| rice (pass), the price of a fixed income security will fall | | | | such as high-coupon bonds. |
| (rise). | | | | It should be noted that interest rate risk and |
| For an investor who plans to hold fixed income | | | | reinvestment risk opposite each other. For example |
| security to maturity, the changes is its price before | | | | interest rate risk is the risk that interest rates will rise, |
| maturity is not of concern, however for an investor | | | | thereby reducing the price of a fixed income security. |
| who may have to sell the fixed income security | | | | In contrast, reinvestment risk is the risk that interest |
| before the maturity date an increase in interest rates | | | | rates will fall. |