In Financial-Markets risk can be related to movements in interest rates, stocks, currencies, commodities etc
Different meastures of Risk
Value at Risk
In the event of default the debt is paid off in the following order:
1) senior unsecured
3) preferred stocks
Tools for viewing and analysing risk
Non-Var - Greeks (delta, vega), higher order (DV01), balance sheet (Mark to market), LID(O), LID(R), SNI
Var - definition the amount of currency which we expect to lose less than in a given holding period at a given confidence interval
This is the uncertainty about the price when we come to sell the bond
Increases with maturity
Is offset by its coupon and yield
This is the risk from inflation and reinvestment risk
Lets assume that during the year interest rates go up
If this capital loss is larger than our coupon
When the market's interest rates rise, then the market price for bonds will fall, reflecting investors' improved ability to get a good interest rate for their money elsewhere
A Bonds risk is measured by its sensitivity to interest rates
The higher the sensitivity the higher the risk.
Fixed rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest rates rise.
Since the payments are fixed, a decrease in the market price of the bond means an increase in its yield.
This is related to the price volatility ??