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Identify and describe two main risks associated with corporate bonds.

Identify and describe two main risks associated with corporate bonds.

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Answer #1

The two main risk associated with corporate bonds would include interest rate risk and credit or default risk.

Interest rate risk: The change in interest rate causes change in price of bond. If interest rate increases the price of bond falls and if interest rate decreases the price of bond would increase. Thus, the bondholders are subject to interest rate risk and changes in interest rate would impact their bond portfolio value.

Default or credit risk: Default or credit risk is the risk that the bond issuer would fail to repay the bond amount. This mean bond issuer would default on repayment of cash borrowed on maturity date of bond. This would generally arise when bond issuer is facing financial difficulty which makes it impossible to repay the bond amount.

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