Question-46: What is a volatility risk?

Answer:  The risk that a change in volatility will adversely affect the price of a security is called volatility risk.

Question-47: What is the meaning of Vega for bonds?

Answer:  Multifactor risk models often refer to volatility risk as Vega. Vega is the term used to measure the sensitivity of an option’s price to a change in volatility.

Question-48: What is a political risk for a bond?

Answer: A bond while invested is non-taxable but later on some political decision the bond is declared as taxable. Then yield on the bond would be highly affected and adversely affect the bond price.

Question-49: How municipal non-taxable bond would be affected if tax rate goes down?

Answer: Suppose you invested in a non-table bond, but tax rated reduces later on it would affect the bond price. Because the main characteristic of the bond is that it is non-taxable. But tax reduces by the municipalities. Which would affect the price of the bond and that reduces and finally yield on the bond would be affected as well.

Question-50: What is the legal risk on the non-taxable bonds?

Answer: Bonds are exposed to two types of political/legal risk you can also say tax risk.

• If federal income tax rate will be reduced. If tax rate is high, the greater is the value of the tax-exempt nature of a municipal bond. If tax rates reduced, the price of a tax-exempt municipal bond will decline.
• Suppose you invested in municipal bond which is tax exempt eventually will be declared taxable Which results is a loss of the tax exemption, the bond will decline in value in order to provide a yield comparable to similar taxable bonds.