The return obtained from a bond or debenture can be split into two parts:
- The face value of the security that is received on maturity or the market value when the security is sold in the secondary market
- The interest payments received from the security over its entire holding period
Several factors affect one or both of these two parts. We can define the risk in any security as a measure of the impact of these market factors on the return characteristics of the security.
The different types of risks that a fixed income investor is exposed to are as follows:
- Interest rate, risk
- Call Risk
- Reinvestment Risk
- Inflation Risk
- Maturity Risk
- Credit Risk
- Volatility risk
- Liquidity Risk
- Political risk
- Exchange-rate risk
- Sector risk
- Event risk
Each of the risk is described below in detail.