Monetary Policy and Investment Opportunities

By Laura S. Nowak | Go to book overview
Save to active project

7
Intermediate- Long-Term Fixed Income Securities

Investors in intermediate-and longer-term fixed income securities face several risks. One is credit risk (the risk that the price of the issue falls due to deteriorating financial abilities of the issuer, which increases the probability that the issuer may be unable to pay either interest or principal or both). This is sometimes called default risk. Another risk faced by investors is interest rate risk (the risk that market interest rates, in general, rise, causing fixed income securities to fall in price). On the other hand, investors also face reinvestment risk (the risk that market interest rates, in general, fall so that opportunities for reinvestment of interest or principal are. lower than expected). Event risk also exists. It is the risk that some "event" occurs and lowers the market's perception of the value of the security (e.g., management discloses plans for a leveraged buyout). Since the firm's debt level will rise, its outstanding bonds will be more risky. Another type of risk is prepayment risk (the risk that some principal is paid back earlier than expected and has to be reinvested under less desirable circumstances). This type of risk is inherent in mortgage pass-through securities. For bonds that are callable, the possibility of being called is also a risk.

In addition to the risks associated with intermediate-and long-term notes and bonds, there are also variations in the form of their cash flows. There are coupon bonds, zero coupon bonds, and floating rate bonds. Most coupon bonds do not actually have coupons anymore. Instead, they are registered and sold in book-entry form, where the holder of record, or his/ her bank, receives the coupon payments on the coupon dates and the full

-123-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited page

Bookmark this page
Monetary Policy and Investment Opportunities
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen
/ 222

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?