Question-41: Does liquidity risk matters, if I need to hold a bond till maturity?

Answer: If you plan to hold a bond until maturity and need not mark a position to market, liquidity risk is not a major concern.

Question-42: Does liquidity risk affect the institutional investor, who regularly mark a bond to market price?

Answer: Yes, an institutional investor who plans to hold an issue to maturity but is periodically marked to market is concerned with liquidity risk.

Question-43: Why institutional investor is marking to market a bond price, even they are holding till maturity?

Answer: Let’s see mutual funds as an example which are required to mark to market at the end of each day the bond holdings that are in their portfolio in order to compute the daily net asset value (NAV). However, other institutional investors may not mark to market as frequently as mutual funds, they are marked to market when reports are periodically sent to clients or the board of directors or trustees.

Question-44: How does bond prices are received for a bond for mark to market?

Answer: As you know, bond market is not exchange traded. Hence their prices are not directly available.  Usually, a portfolio manager or trader will get indicative bids from several dealers and then use some process to determine the bid price used to mark the position.

Question-45: What is currency risk?

Answer:  A non-dollar-denominated bond has unknown U.S. dollar cash-flows. The dollar cash-flows are dependent on the foreign-exchange-rate at the time the payments are received. And if foreign currency depreciates or dollar appreciates w.r.t that foreign currency. Then investor would receive less dollar than expected and that is known as currency risk.