Question-6: What do you mean by interest rate level risk?

Answer: As you know the price of a bond moves in the opposite direction of the change in interest rates. Suppose interest rates fall, the price of a fixed income security will rise.

Question-7: Can you explain, how does it affect if investor hold the bond for maturity with interest rate?

Answer: Suppose you hold a bond till maturity, if price change before maturity, you are not worried. But, if you want to sell the bond before the maturity date, and interest rates increases it means the realization of a capital loss (because price of the bond will drop). This risk is referred to as interest-rate risk which is one of the primary risks faced by an investor in the fixed income market.

Question-8: Why treasury yields are important for bond holders?

Answer: All the returns in the bond market are compared with the treasury yields. Because treasury the safest debt instruments, everybody is looking for the more return then treasury, if invested in any other bond. Because they are riskier than treasury. Most other bonds yields are compared to the Treasury levels and are quoted as spreads off appropriate Treasury yields. To the extent that the yields of all fixed income securities are interrelated, their prices respond to changes in Treasury rates.

Question-9: How do you quantify the interest rate risk?

Answer: Interest rate risks are quantified using the Duration and this is one of the most common way. Duration is the approximate percentage change in the price of a bond or bond portfolio due to a 100 basis point change in yields.

Question-10: What does a yield-curve represent?

Answer: The yield-curve shows the relationship between the yield on bonds of the same credit quality with different maturities.