Question-51: Can you give some example of the even risk for the bond investor?
Answer: Sometime, an issuer/borrower does not make interest and principal payments because of
- A natural accident
- Industrial accident
- A takeover
- Corporate restructuring.
These risks are referred to as event risk. Few examples
- Covid-19 affected the market and people are not able to make payment.
- Cancellation of nuclear power plant.
- Cancellation of the big water project.
- Cancellation of toll road constructions etc.
Question-52: How do you get the bonds portfolio active return?
Answer: The difference between Portfolio’s actual return minus the benchmark (against which portfolios is tracked) is known as actual return.
Active return = Portfolio’s actual return – Benchmark’s actual return
Question-53: Which are the types of risk included in the interest rate risk for a bond?
Answer: Interest-rate risk is the risk associated with an adverse/major change in interest rates which includes
- Level risk
- Yield-curve risk.
Question-54: How can you measure the level risk?
Answer: To measure the level risk, we can use the duration.
Question-55: Which is the measure for the yield-curve risk?
Answer: Key rate duration is the most popular measure of yield-curve risk.
