Risk

RECENT NEWS
New York Times  5 hrs ago  Comment 
Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, told a Senate committee that the diplomatic approach to relieving the risk of a nuclear conflict was the right one.
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Mondo Visione  Jul 28  Comment 
CreditSights, the leading independent global credit market research provider, announced today that it is integrating its BondScore and Ratings quantitative models into a combined Risk Products platform. The integration will allow financial...
Daily FX  Jul 28  Comment 
The drop in global equities and other sentiment-sensitive assets (including Yen crosses) continued into the new trading week.
Daily FX  Jul 28  Comment 
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Euromoney  Jul 27  Comment 
Latin America’s markets need a shot in the arm; instead they’re getting a shot in the face.




 

Risk in economic terms indicates the probability of the occurance of a specific event, which would lead to damage or loss (p.e. the likelihood of losing ship and freight to a hurricane). In distinction to risk, chance indicates the possibility of a positive outcome.

Investments include both risk and chance. This is the so called Risk-Return Tradeoff: low levels of uncertainty offer low potential returns but also low potential losses, whereas high levels of uncertainty offer high potential returns but also high potential losses. Another way many investors quantify and calculate risk is in terms of the standard deviation of returns. This is because all else being equal, risk averse investors prefer returns that are less volatile and more predictable.

Companies try to identify, analyse and control risk through concepts of risk management.

Risks of Bond Investing

Bonds carry credit risk ("will I get my money back?"), prepayment risk, liquidity risk and interest-rate risk.

  • Many bonds give the bond issuer the right to repay the bond early -- which happens more often when rates are low, in other words, just when you don't want your money back. This is prepayment risk.
  • Liquidity risk is the risk that you won't find a good price for your bond when you want to sell it -- because there are so many more bond issuers than stock issuers, and because bonds are not exchange-traded, there may not be a willing buyer.
  • Interest-rate risk is the opposite of prepayment risk: when rates go up, the value of your bond will drop (it drops more, the further away it is from maturity). If your circumstances change and you need to sell the bond before maturity, you can lose capital that you would otherwise receive, if you held the bond to maturity.
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