Identifying and quantifying the risk in Vanilla Bonds.
The two main parts which affect the return from bonds during time held are:
The bond value when it is sold.
The cash flow received during the period obtained.
Many market factors influence the return on bonds, in form of risk, thus, risk can be seen as the impact of market factors on the bond return. Furthermore, bonds investors are exposed to various types of risk, such risks as, interest rate risk, price risk, yield – curve risk, credit risk, liquidity risk, reinvestment risk and etc., Fabbozi (2001) . There are more forms of risks; however, the analysis incurred will focus on the mentioned risks as that are required for the purpose of the study. A brief description of these risks would be appropriate in order to build up to the analysis.