1. Interest rate risk
•It is relevant for investors who trade fixed income securities in the secondary market.
•Price of fixed income securities falls when interest rates rise.
•This risk can be minimized by investing in shorter maturity securities, or those with different duration.
2. Liquidity risk
•It is a risk where the investment can’t be bought or sold quickly.
•It can be minimized by investing in highly rated instruments as their marketability is higher.
•Government securities have low liquidity risks (but carry charges), while corporate deposits are not as liquid.
3. Reinvestment risk
•It is a risk where the reinvested money won’t earn the same return as the original investment.
•This risk is high for callable bonds, as the holder may not be able to invest the proceeds at a comparable rate after the bonds are called by its issuer.
•This risk can be minimized by staggering potential call dates of different bonds, reducing the chances of all being called at once.
4. Inflation risk
•This risk may reduce the value of returns due to inflation, as the purchasing power of your fixed income return declines.
•It can be minimized by dividing the investments evenly among bonds that mature at regular intervals, also known as bond laddering.
5. Credit/default risk
•It is a risk where the promised returns or the principal are not received.
•XXX-rated bonds have a high default risk and are at the bottom of the scale, while AAA-rated corporate instruments are at the top.
•This risk can be minimized by buying securities with higher credit ratings which have lower risks.
6. Downgrade risk
•It refers to the risk that your investment’s credit rating may be downgraded by various credit rating agencies.
•This risk can be minimized by refraining from buying securities with negative outlook.
•It is relevant for investors who trade fixed income securities in the secondary market.
•Price of fixed income securities falls when interest rates rise.
•This risk can be minimized by investing in shorter maturity securities, or those with different duration.
2. Liquidity risk
•It is a risk where the investment can’t be bought or sold quickly.
•It can be minimized by investing in highly rated instruments as their marketability is higher.
•Government securities have low liquidity risks (but carry charges), while corporate deposits are not as liquid.
3. Reinvestment risk
•It is a risk where the reinvested money won’t earn the same return as the original investment.
•This risk is high for callable bonds, as the holder may not be able to invest the proceeds at a comparable rate after the bonds are called by its issuer.
•This risk can be minimized by staggering potential call dates of different bonds, reducing the chances of all being called at once.
4. Inflation risk
•This risk may reduce the value of returns due to inflation, as the purchasing power of your fixed income return declines.
•It can be minimized by dividing the investments evenly among bonds that mature at regular intervals, also known as bond laddering.
5. Credit/default risk
•It is a risk where the promised returns or the principal are not received.
•XXX-rated bonds have a high default risk and are at the bottom of the scale, while AAA-rated corporate instruments are at the top.
•This risk can be minimized by buying securities with higher credit ratings which have lower risks.
6. Downgrade risk
•It refers to the risk that your investment’s credit rating may be downgraded by various credit rating agencies.
•This risk can be minimized by refraining from buying securities with negative outlook.