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Unit 14: Making recommendations - Coggle Diagram

- - - - changes in the bond prices
    - - deflation
  - - - due to an issuer's financial strength
    - - risk that the investor will not be able to get all of their investments back
    - - Operating risk caused by poor management decisions
    - - "Marketability risk", risk that an investor is not able to sell an investment quickly at a fair market price
    - - Risk that a regulation can affect a business
    - - Change in a law
    - - mostly in emerging economies
    - - Risk that a country defaults in its debt obligations
  - - - risk that a bond might be called before maturity and an investor will be unable to reinvest the principal at the same interest rate
      - Call protection: period during which the bond cannot be called
      - Reinvestment risk
        
        Interest rate up -> difficult to reinvest interest payment
        
        Interest rate down
        
        High rate bonds get called
        
        Then issue new one at lower rate, to cut costs
        
        this hurts the investor because they loose the higher rate bond income
        
        Investors get their money back sooner than expected
        
        Now they have to reinvest that money, but new investments pay less
        
        To earn the same income, they may have to take on more risk
      - Prepayment risk
        
        chance that a bond is repaid early, forcing the investor to reinvest at lower interest rates and potentially earn less income
    - - Risk that an investment made in a foreign currency could decline if the value of that currency declines against the US dollar