What is the debt market? Know the risks and benefits here
Are you planning to invest in the debt market and don’t know the basics and technical details? The BSE has explained what the debt market is and other related details for your reference.
According to the BSE, the debt market is the market where fixed income securities of various types and characteristics are issued and traded.
See Zee Business Live TV Streaming below:
Debt markets are therefore markets for fixed income securities issued by central and state governments, municipal corporations, government agencies and commercial entities such as financial institutions, banks, public sector units, public limited companies and also structured financial instruments.
Why invest in fixed income securities?
Fixed income securities offer a predictable flow of payments in the form of interest and return of principal when the instrument matures. Debt securities are issued by eligible entities against sums borrowed by them from investors in these instruments.
Therefore, most debt securities bear a fixed charge on the assets of the entity and generally enjoy a reasonable degree of security in respect of the security of the real estate and / or movable assets of the business.
Investors benefit from investing in fixed income securities as they preserve and increase their invested capital and also ensure receipt of regular interest income.
Investors can even neutralize the risk of default on their investments by investing in government securities, which are normally referred to as risk-free investments due to the sovereign guarantee on these instruments.
The prices of debt securities display a lower average volatility compared to the prices of other financial securities and provide greater security for the investments that accompany them. Debt securities allow broad and efficient portfolio diversification and thus help mitigate portfolio risks.
What are the different types of risk associated with debt securities?
The risks associated with debt securities are as follows:
1. Default risk: it can be defined as the risk that an issuer of a bond will not be able to make timely payment of interest or principal on a debt security or to comply with it. another way to the provisions of a bond contract and is also called credit risk.
2. Interest rate risk: This is the risk resulting from an unfavorable variation in the interest rate prevailing on the market so as to affect the return on existing instruments.
3. Reinvestment rate risk: This is the probability of a drop in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market.
The risks associated with trading in debt securities are as follows:
1. Counterparty risk: This is the normal risk associated with any transaction and refers to the failure or inability of the opposing party to the contract to deliver the promised value or the sale value at the time of settlement.
2. Price risk: This is the possibility of not being able to receive the expected price on an order due to an unfavorable price movement.