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Series 6 A
Fixed income Securities Risk
Question | Answer |
---|---|
Credit Risk | possibility that principal or interest will not be paid. Credit risk is usually measured against US Treasuries, which are considered to have none. |
Interest Rate risk | Possibility that increase in general level of interest rates will drive down prices of existing fixed-income investments. Long-term fixed income securities have more of this risk than those with shorter maturities. |
Inflationary (Purchasing Power risk) | Rise in general level of prices reduces the value of fixed payments. Some debt investors attempt to reduce this risk in their portfolios through equity investments or investments in gold. |
Call Risk | Bonds are more likely to be called when rated have dropped, forcing reinvestment of principal at low rates. Many bond issues are callable. |
Prepayment risk | Possibility that homeowners will repay mortgages more quickly than expected when interest rates fail. This risk is present in mortgage-backed securities and CMOs. |