Market (SYSTEMATIC) Risk – risk that a security will decline due to negative market conditions. All securities have market risk that could be caused by a major government decision.
Business (NON-SYSTEMATIC) Risk – risk that a corporation does not perform to expectations.
Credit Risk – risk that the principle and interest is not paid on time.
Liquidity (MARKETABILITY) Risk – risk that the security is not easily traded (long-term bonds)
Interest (MONEY RATE) Risk – risk that the bond prices will decline with increasing interest rates.
NOTE – All bonds have interest risk including zero coupon bonds, T-bills and T-Strips.
Reinvestment Risk – additional risk taken with interest and dividends received each year.
NOTE – Zero coupon bonds, T-bills and T-Strips have no reinvestment risk.
Purchasing Power (INFLATION) Risk – Looks at how the return on the investment compares with the inflation rate.
Long-term bonds and fixed annuities have high inflation risk.
NOTE – To reduce inflation risk, investors may buy variable annuities
Real rate of return – rate of return on an investment compared to the inflation rate
Capital Risk – risk of losing all money invested (options and warrants). Since options and warrants have expiration dates, purchasers may lose all money invested at expiration.
Regulatory (LEGISLATIVE) Risk – Risk of law changes