DEFINITION: A long term debt instrument in which a

borrower agrees to make payment of principle and

interest, on specific dates to the holders of the bond.
Primarily traded in the over-the-counter (OTC)
market.
Most bonds are owned by and traded among large
financial institutions.
Full information on bond trades in the OTC market is
not published, but a representative group of bonds is
listed and traded on the bond division of the B.S.E.


All investments offer a balance between risk and
potential return. The risk is the chance that you will lose
some or all the money you invest. The return is the
money you stand to make on the investment.
Higher the returns, higher the risk and vice versa.
The bond market is no exception to this rule. Bonds in
general are considered less risky than stocks. Reasons
for this include:
1. Bonds carry the promise of their issuer to return the
face value of the security to the holder at maturity; stocks
have no such promise from their issuer.
2. Most bonds pay investors a fixed rate of interest
income that is also backed by a promise from the issuer.
Stocks sometimes pay dividends, but their issuer has no
obligation to make these payments to shareholders.



DEFINITION:Interest rate risk is risk to the earnings or
market value of a portfolio due to uncertain future interest
rates.
Like all bonds, corporates tend to rise in value when
interest rates fall, and they fall in value when interest
rates rise. Usually, the longer the maturity, the greater the
degree of price volatility.
When interest rates rise, new issues come to market with
higher yields than older securities, making those older
ones worth less. Hence, their prices go down.
When interest rates decline, new bond issues come to
market with lower yields than older securities, making
those older, higher-yielding ones worth more. Hence,
their prices go up.
Various economic forces affect the level and direction of
interest rates in the economy. Interest rates typically
climb when the economy is growing, and fall during
economic downturns.

DEFINITION :Call risk is the risk that a bond issuer will
redeem its bonds before they mature.
Some bonds are callable, that is, the issuer has the right to
call, or buy back all or some of the bonds before they
mature. This often happens when interest rate risk rates fall.
For example, consider a callable 10-year, 10% coupon bond
issued by XYZ Company. Presumably, XYZ Company issued
the debt at prevailing market rates. But as time passes,
market rates may change. If rates fall to 5% while the bonds
are outstanding, XYZ Company would be paying twice the
going interest rate. Clearly, this situation costs XYZ
Company money, and if it can call the debt and reissue it at
the lower 5% rate, it will probably do so.
Call risk leads to reinvestment risk. In our example, XYZ
Company's call provision means bondholders no longer
have the promise of 10 years of 10% interest payments. So, if
XYZ Company does call its bonds, bondholders will receive
their principal back (plus a call premium), but then they will
have to reinvest that money in a lower interest rate
environment. It may then be difficult, if not impossible, to
find other investments with returns as high as the XYZ
Company bonds.
DEFINITION: Reinvestment risk is the chance that an
investor will not be able to reinvest cash flows from an
investment at a rate equal to the investment's current
rate of return.
For example, consider a Company XYZ bond with a
10% yield to maturity (YTM). In order for an investor to
actually receive the expected yield to maturity, she
must reinvest the coupon payments she receives at a
10% rate. This is not always possible. If the investor
could only reinvest at 4% (say, because market returns
fell after the bonds were issued), the investor's actual
return on the bond investment would be lower than
expected.
An unusual situation
where short-term
interest rates are
higher than long-
term rates.
In the early 1980s,
when short-term
interest rates were
around 20%, while
long-term rates went
up to only 16% or
17%.



DEFINITION: Credit risk is the chance that a bond
issuer will not make the coupon payments or principal
repayment to its bondholders. In other words, it is the
chance the issuer will default.
Many factors can influence an issuer's credit risk and
in varying degrees. Some examples are poor or falling
cash flow from operations, rising interest rates or
changes in the nature of the marketplace that
adversely affect the issuer (such as a change in
technology, an increase in competitors, or regulatory
changes).
All bonds, except for those issued by the Indian
government, carry some credit risk. This is one reason
corporate bonds almost always have higher coupon
payment amounts than government bonds.
DEFINITION: Liquidity risk is the risk that a company or
bank may be unable to meet short term financial demands.
This usually occurs due to the inability to convert a
security or hard asset to cash.
Liquidity risk generally arises when a business or
individual with immediate cash needs, holds a valuable
asset that it can not trade or sell at market value due to a
lack of buyers, or due to an inefficient market where it is
difficult to bring buyers and sellers together.
For example, consider a Rest 1,00,00,000 home with no
buyers. The home obviously has value, but due to market
conditions at the time, there may be no interested buyers.
In better economic times when market conditions improve
and demand increases, the house may sell for well above
that price. However, due to the home owners need of cash
to meet near term financial demands, the owner may be
unable to wait and have no other choice but to sell the
house in an illiquid market at a significant loss.
DEFINITION: Exchange-rate risk, also called currency
risk, is the risk that changes in the value of certain
currencies will reduce the value of investments
denominated in a foreign currency.
Exchange-rate risk matters because exchange rates
affect the amount of money the investor actually sees
at the end of the day, and this in turn determines what
the investor's rate of return ultimately is.
However, exchange-rate risk can create opportunities
because the interest rates between two countries often
reflect expected changes in the exchange rate between
them. This is because when interest rates increase in a
particular country, international money flows into that
country to capture the higher yields. This pushes the
value of that country's currency higher.

DEFINITION: Inflation risk, also called purchasing
power risk, is the chance that the cash flows from an
investment won't be worth as much in the future
because of changes in purchasing power due to
inflation.
Inflation causes money to lose value, and any
investment that involves cash flows over time is
exposed to this inflation risk. The consequences of this
can be serious: The investor earns a lower return that
he or she originally expected, in some cases causing
the investor to withdraw some of a portfolio's principal
if he or she is dependent on it for income.
It is important to note that inflation risk isn't the risk
that there will be inflation, it is the risk that inflation will
be higher than expected.

DEFINITION: Probability that the government of a
country (or an agency backed by the government)
will refuse to comply with the terms of a loan
agreement.
This usually occurs during economically difficult or
politically volatile times or that a central bank will
impose foreign exchange regulations that will reduce
or negate the value of foreign exchange contracts.