COMM 298 Lecture 13: 13.pdf
Document Summary
Class 13: bond risks, real returns, yield curves. Objectives (cid:79) understand the risks associated with holding bonds. Risks associated with holding bonds (1) (cid:79) although government bonds are often referred to as riskless securities, there are several sources of risks that affect all bonds, including government bonds: (cid:79) risks that affect all bonds: Interest rate / price risk (cid:79) prices of existing bonds go up and down when interest rates change. Reinvestment risk (cid:79) reinvestment risk refers to the fact that for coupon-paying bonds, you do not know at which interest rate you will be able to reinvest these coupons. Inflation risk (cid:79) since the nominal payments are fixed, a general rise in the price level hurts the holders of fixed-income securities (more about this next class). Risks associated with holding bonds (2) (cid:79) risks that affect primarily corporate bonds:
