Bonds are also subject to various other risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, sovereign risk and yield curve risk. Again, some of these will only affect certain classes of investors. Price changes in a bond will immediately affect mutual funds that hold these bonds. If the value of the bonds in their trading portfolio falls, the value of the portfolio also falls. This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers (irrespective of whether the value is immediately "marked to market" or not). If there is any chance a holder of individual bonds may need to sell his bonds and "cash out", interest rate risk could become a real problem (conversely, bonds' market prices would increase if the prevailing interest rate were to drop, as it did from 2001 through 2003. One way to quantify the interest rate risk on a bond is in terms of its duration. Efforts to control this risk are called immunization or hedging. Bond prices can become volatile depending on the credit rating of the issuer - for instance if the credit rating agencies like Standard & Poor's and Moody's upgrade or downgrade the credit rating of the issuer. An unanticipated downgrade will cause the market price of the bond to fall. As with interest rate risk, this risk does not affect the bond's interest payments (provided the issuer does not actually default), but puts at risk the market price, which affects mutual funds holding these bonds, and holders of individual bonds who may have to sell them. A company's bondholders may lose much or all their money if the company goes bankrupt. Under the laws of many countries (including the United States and Canada), bondholders are in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some other creditors. Bank lenders, deposit holders (in the case of a deposit taking institution such as a bank) and trade creditors may take precedence. There is no guarantee of how much money will remain to repay bondholders. As an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds. Bonds are subject to various other risks , such as call and prepayment risk, credit risk , and reinvestment risk , and liquidity risk , and the risk of the event, the risk of exchange rate fluctuations and risk and inflation risk and credit risk and the risk of the yield curve as well. Again , some of which will only affect certain categories of investors . Will affect changes in bond prices immediately investment funds that hold bonds. If the value of bonds in their trading portfolio fall, as fell the value of the portfolio. This can be devastating for professional investors such as banks, insurance companies , pension funds and asset managers ( regardless of whether the value is immediately " mark to market " or not) . If there is a chance you may need to bondholders individual to sell bonds and " cash out " , could be the risk of interest rates becomes a real problem ( on the contrary , the market price of the bonds increase if the rate of interest prevailing is to fall , as it did in 2001 -2003 . wrong one way to measure the interest rate risk of bonds in terms of duration . called efforts to control these risks immunization or hedge .

• published: 02 Mar 2014
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