Thursday, October 30, 2008


Inflation or Purchasing power Risk.
Inflation risk or purchasing power risk,arises because of the variation in the value of cash flows from a security due to inflation as measured in terms of purchasing power.
For example , If an investor purchases a five year bond in which he or she can realized a coupon rate of 7%,but the rate of inflation is 8%,then the purchasing power of the cash flow has declined.
For all but adjustable or floating rate bonds, an investor is exposed to inflation risk because the issuer promises to make is fixed for the life of security.To the extent that interest rates reflect the extend to make is fixed for the life of the security.Floating rate bonds have a lower level of inflation risk.
Marketability or Liquidity Risk.
Marketability risk, or liquidity risk,involves the case with which an issue can be sold at or near its true value.The primary measure of marketability,liquidity is the size of the spared between the bid of price and the offer price and the offer quoted by a dealer.The greater the dealer spared the grater the marketability liquidity risk.For an investor who plans to hold the bond until the maturity date marketability/liquidity risk is less.

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