![]() ![]() Therefore, making the distinction between the two financial instruments by providing current working definitions and typical examples of stocks and bonds is an important enterprise. Retrieved DecematĮferences to the terms "stocks" and "bonds" are frequently heard in the mainstream media and throughout the investment literature, but the terms may not be completely understood by the general public. (2008) Advanced Bond Concepts: Term Structure of Interest Rates. The degree of default risk will be measured by bond rating agencies and that will determine the risk premium that the corporation must pay in order to raise funds in the bond market. Therefore, it is important for the issuers of corporate bonds to understand that they must add in a risk premium to account for the default risk. Corporate bonds, however, contain default risk. Thus, they are considered risk free, in the sense that there is no default risk, only market risk. ![]() The main difference between corporate bonds and Treasury bonds is that the latter are guaranteed by the government. In both cases, the bonds that were the most severely affected by the interest rate shocks were the longer-term maturities.Ī g) Even Treasury bonds are risky, because short-term fluctuations in the interest rate can impact the value of the cash flows that they are to receive.
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