Other Risks in Corporate Bonds
-Default Risk has been discussed above but there are also other risks for which corporate bondholders expect to be compensated by credit spread. This is, for example why the Option Adjusted Spread on a Ginnie Mae MBS will usually be higher than zero to the Treasury curve.
-Credit Spread Risk. The risk that the credit spread of a bond (extra yield to compensate investors for taking default risk), which is inherent in the fixed coupon, becomes insufficient compensation for default risk that has later deteriorated. As the coupon is fixed the only way the credit spread can readjust to new circumstances is by the market price of the bond falling and the yield rising to such a level that an appropriate credit spread is offered.
-Interest Rate Risk. The level of Yields generally in a bond market, as expressed by Government Bond Yields, may change and thus bring about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly appropriate levels.
-Liquidity Risk. There may not be a continuous secondary market for a bond, thus leaving an investor with difficulty in selling at, or even near to, a fair price. This particular risk could become more severe in developing markets, where a large amount of junk bonds belong, such as China, Vietnam, Indonesia, etc.
-Supply Risk. Heavy issuance of new bonds similar to the one held may depress their prices.
-Inflation Risk. Inflation reduces the real value of future fixed cash flows. An anticipation of inflation, or higher inflation, may depress prices immediately.
-Tax Change Risk. Unanticipated changes in taxation may adversely impact the value of a bond to investors and consequently its immediate market value.
Read more about this topic: Corporate Bond
Famous quotes containing the words risks, corporate and/or bonds:
“There are risks which are not acceptable: the destruction of humanity is one of them.”
—Friedrich Dürrenmatt (1921–1990)
“The generation of women before us who rushed to fill the corporate ranks altered our expectations of what working motherhood could be, tempered our ambition, and exploded the supermom myth many of us held dear.”
—Melinda M. Marshall (20th century)
“My Christian friends, in bonds of love, whose hearts in sweetest union join,
Your friendship’s like a drawing band, yet we must take the parting hand.
Your company’s sweet, your union dear; Your words delightful to my ear,
Yet when I see that we must part, You draw like cords around my heart.”
—John Blain (18th century)