What are the risks associated with debt securities?

Debt funds

are generally considered safer as compared to equity funds as they primarily invest in rated and risk-free government and corporate bonds. However, these are not 100 per cent risk free. Following are the risks associated with

debt securities

:

1) Default Risk

Default risk can be defined as the risk that an issuer of a bond may be unable to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture and is also referred to as credit risk.

2) Interest Rate Risk

Interest rate risk can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market so as to affect the yield on the existing instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a situation where the investors' money is locked at lower rates whereas if he had waited and invested in the changed interest rate scenario, he would have earned more.

3) Reinvestment Rate Risk

Reinvestment rate risk can be defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market.

Following are the risks associated with trading in debt securities:

1) Counter Party Risk

It is the normal risk associated with any transaction and refers to the failure or inability of the opposite party to the contract to deliver either the promised security or the sale-value at the time of settlement.

2) Price Risk

Price risk refers to the possibility of not being able to receive the expected price on any order due to a adverse movement in the prices.

READ MORE ON DEBT MARKETS

What is the Money Market?
What is the Debt Market?
Why should one invest in fixed income securities?
Advantages of investing in Government Securities
Who can issue fixed income securities?
What are different types of fixed income securities
What is the importance of the Debt Market to the economy?


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