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Also known as “systemic risk”; is the possibility to experience losses due to factors that affect the performance of the financial markets. This risk cannot be avoided, but its effects can be lessened through diversification. The risk that Recession will cause a decline in the financial markets as a whole is an example of market risk. Other examples include natural disasters, changes in interest rates and political unrest just to name a few.
In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. You may have a gain or loss if you sell a bond prior to its maturity date.
Municipal Bond Risk
A portion of municipal bond’s income may be subject to state or local taxes. A portion of a municipal bond’s income may be subject to the federal alternative minimum tax.
The risk for bond investors that the issuer will default on its obligation (default risk) or that the bond value will decline and/or that the bond price performance will compare unfavorably to other bonds against which the investment is compared due either to perceived increase in the risk that an issuer will default (credit spread risk) or that a company’s credit rating will be lowered (downgrade risk).
The duration of a bond is a measure of its price sensitivity to interest rates movements, based on the average time to maturity of its interest and principal cash flows. Duration enables an investor to more easily compare bonds with different maturities and coupon rates by creating a simple rule: with every percentage change in interest rates, the bond’s value will decline by its modified duration, stated as a percentage. Modified duration is the approximate percentage change in a bond’s price for each 1% change in yield assuming yield changes do not change the expected cash flows. For example, an investment with a modified duration of 5 years will rise 5% in value for every 1% decline in interest rates and fall 5% in value for every 1% increase in interest rates. Bond duration measurements help quantify and measure exposure to interest rate risks. Bond portfolio managers increase average duration when they expect rates to decline, to get the most benefit, and decrease average duration when they expect rates to rise, to minimize the negative impact. The most commonly used measure of interest rate risk is duration.
This is the risk that inflation will undermine the performance of your investment. Bonds are more susceptible due to their fixed income and possible long-term exposure to rises in inflation.
This is a category or type of investment which has similar characteristics and behaves similarly when subject to particular market forces. Broad financial asset classes are stocks (or equity), bonds (fixed income) and cash. Real estate, precious metals, and commodities can also be viewed as asset classes.
Investment performance measured over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.