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Interest-rate risk, credit risk, and return measurement

Fixed income · Lesson 4 of 5

Lesson 4 of 5

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Lesson 4 of 5 · Fixed income

Interest-rate risk, credit risk, and return measurement

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By the end you’ll be able to

Describe major fixed-income risks, including interest rate risk, reinvestment risk, credit risk, liquidity risk, call risk, prepayment risk, and inflation risk.
Calculate and interpret Macaulay duration, modified duration, money duration, price value of a basis point, and approximate percentage price change for a bond given a change in yield.

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Describe the determinants of credit risk, including capacity and willingness to pay, seniority, collateral, leverage, and bond covenants, and interpret credit ratings and credit migration at a basic level.

Calculate and interpret holding period return and distinguish the effects of coupon income, reinvestment income, capital gain or loss, and currency effects when relevant.

Explain how yield volatility, maturity, coupon, and embedded options affect a bond’s interest rate sensitivity and return profile.

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