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Type Of Risk Essay

2058 words - 9 pages

Interest rate risk is the chance that an unexpected change in interest rates will negatively affect the value of an investment.
How it works/Example:
Let's assume you purchase a bond from Company XYZ. Because bond prices typically fall when interest rates rise, an unexpected increase in interest rates means that your investment could suddenly lose value. If you expect to sell the bond before it matures, this could mean you end up selling the bond for less than you paid for it (a capital loss). Of course, the magnitude of change in the bond price is also affected by the maturity, coupon rate, its ability to be called, and other characteristics of the bond.
One common way to measure a ...view middle of the document...

Business risks can be classified by the influence by two major risks: internal risks (risks arising from the events taking place within the organization) and external risks (risks arising from the events taking place outside the organization).[4]
Internal risks arise from factors (endogenous variables, which can be controlled) such as human factors (talent management, strikes), technological factors (emerging technologies), physical factors (failure of machines, fire or theft), operational factors (access to credit, cost cutting, advertisement). External risks arise from factors (exogenous variables, which cannot be controlled) such as economic factors (market risks, pricing pressure), natural factors (floods, earthquakes), political factors (compliance and regulations of government).[5][6]
Credit risk is the chance that a bond issuer will not make the coupon payments or principal repaymentto its bondholders. In other words, it is the chance the issuer will default
How it works/Example:
While the definition of credit risk may be straight forward, measuring it is not.  Many factors can influence an issuer's credit risk and in varying degrees. Some examples are poor or falling cash flowfrom operations (which is often needed to make the interest and principal payments), rising interest rates (if the bonds are floating-rate notes, rising interest rates increase the required interest payments), or changes in the nature of the marketplace that adversely affect the issuer (such as a change in technology, an increase in competitors, or regulatory changes). The credit risk associated with foreign bonds also includes the home country's sociopolitical situation and the stability and regulatory practices of its government.
Ratings agencies like Moody's and Standard & Poor's analyze bond offerings in an effort to measure an issuer's credit risk on a particular security. Their results are published as ratings that investors can track and compare with other issuers.
S&P's ratings range from AAA (the most secure) to D, which means the issuer is already in default. Moody's ratings go from Aaa to C. Only bonds rated BBB or better are considered "investment grade." Bonds rated below BBB- or Baa3 are considered "junk."
What it is:
Call risk is the risk that a bond issuer will redeem its bonds before they mature.
How it works/Example:
Some bonds are callable, that is, the issuer has the right to call, or buy back all or some of the bonds before they mature. This often happens when interest rate risk rates fall. For example, consider a callable 10-year, 10% coupon bond issued by XYZ Company.  Presumably, XYZ Company issued thedebt at prevailing market rates. But as time passes, market rates may change. If rates fall to 5% while the bonds are outstanding, XYZ Company would be paying twice the going interest rate. Clearly, this situation costs XYZ Company money, and if it can call the debt and reissue it at the lower 5% rate, itwill probably do...

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