Tuesday, October 28, 2008


Market or Interest rate risk.
The price of typical fixed income security moves in the opposite direction of the change in interest rates.As interest rate rice (pass),the price of a fixed income security will fall(rise).
For an investor who plans to hold fixed income security to maturity,the changes is its price before maturity is not of concern,however for an investor who may have to sell the fixed income security before the maturity date an increase in interest rates will mean the realization of a capital loss.This risk is referred to as market risk,or interest rate which is by far the biggest risk faceted by an investor in the fixed income market.
It is customary to represent the market by the yield levels on treasury securities.Most other yields are compared to the treasury levels and are quoted as spreads off appropriate treasury yields.To the extend that the yields of all fixed income securities are interrelated there prices respond to changes in treasury rates.
The actual magnitude of the price response for any security depends on various characteristics of the security such as coupon,maturity,and the options embedded into the security.

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