Discus factors affecting value of a bond
Bonds are financial instruments which provides fixed returns to its holders. Bonds actually have a nature of debt with a fixed interest rate and a maturity, also known as Plain Vanilla Bond.
Buying the Federal Bond is one of the safest investment tools. Since these are issued by the government, there is almost negligible chance of default on maturity. As it involves no risk, the interest earned on such investments is very low. For an investor, whose risk appetite is low and wants a secured investment should buy the Federal Bonds.
Corporate Bonds are issued by respective corporates. It involves certain risk as there are chances of default on repayment. Although the credit rating agencies rate the bonds on the creditworthiness of the companies, still such investments are riskier. An investor investing in Corporate Bonds would demand a greater interest rate to compensate for the risk taken. Risk premium is the difference between the market interest rate and the risk-free interest rate. Risk and return are directly proportional. Greater the risk, higher the reward and lower the risk, lower the reward.
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