risk factors of debentures
Answers
Answer:
Explanation:
With the recent poor performance in equity markets, many investors are attracted to the high rates of interest being offered by debenture and unsecured note issuers, some as high as 15 per cent.
However, some investors mistakenly believe debentures and unsecured notes are the same as fixed term deposits with banks, except with a higher interest rate.
The confusion is not surprising, as nearly all investors are used to receiving interest from their bank deposits. It follows that where they receive interest from a debt security they liken it to a bank deposit.
The risk factors of debentures include:
a) Interest rate risk.
b) Credit risk.
c) Default risk.
Explanation:
The interest risk rate is defined as the risk of payment when a particular person has to pay for his loans and the interests will become due at some conditions when the person is unable to pay them on time. The rate of risks in the interest will increase when the amount of dues in the banks will become high.
Credit risks are the risks when a person is unable to pay the dues of the credit card through which he has bought a lot of money to purchase his products.
Finally, default risk is one which occurs in banks due to the high interest rates and unexpected degradation in the economic conditions of the bank.