8/13/2019 14- Risks Involved in Fixed Income Securities

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11/12/13 Factors That Affect the Price of Fixed-Income Securities

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TYPES OF BONDSFixed-Rate Capital Securities Contents

An Innovative Alternative for the Income-Oriented Investor [ /learnmore.asp?catid=5&subcatid=20&id=158 ]

How Fixed-Rate Capital Securities Work [ /learnmore.asp?catid=5&subcatid=20&id=159 ]Putting Higher Yields in Context [ /learnmore.asp?catid=5&subcatid=20&id=160 ]Distinctive Features of Fixed-Rate Capital Securities [ /learnmore.asp?catid=5&subcatid=20&id=161 ]Income, Capital Gains and Taxation [ /learnmore.asp?catid=5&subcatid=20&id=162 ]Factors That Affect the Price of Fixed-Income Securities [ /learnmore.asp?catid=5&subcatid=20&id=163 ]Questions Investors Should Ask [ /learnmore.asp?catid=5&subcatid=20&id=165 ]Fixed-Rate Capital Securities Summary of Alternative Structures [ /learnmore.asp?catid=5&subcatid=20&id=165#summtable ]Glossary [ /learnmore.asp?catid=5&subcatid=20&id=166 ]

Factors That Affect the Price of Fixed-Income SecuritiesFixed-rate capital securities have certain risks in common with other fixed-income securities. These risks affect the marketprice of the securities, which in turn affects their yield. In general, investors demand higher yields to compensate for higher

risks . The risks of fixed-income securities include:

Interest Rate RiskThe market value of the s ecurities will be inversely affected by movements in interest rates. When ratesare rising, market prices of existing debt securities will fall, as demand increases for new-issue securities with the higherrates. As prices decline, yields are brought into line with the prevailing rates. When rates are falling, market prices wi ll rise,because the higher rates on outstanding debt securities will be m ore valuable. Here, too, the market works to align theyields with prevailing rates. Downward trends in interest rates als o create reinvestment risk, or the risk that income orprincipal repayments will have to be invested at lower rates. Reinvestment risk is an important consideration for investors incallable securities.

Credit RiskThe safety of a fixed-income investors principal depends on the issuers credit quality and abili ty to meet itsfinancial obligations. Issuers with lower credit ratings usually have to offer investors higher yields to compensate for theadditional credit risk. A change in either the issuers credit rating or the markets perception of the issuers bus inessprospects will affect the value of its outstanding securities.

Purchasing Power RiskFixed-income investors often focus on the real rate of return, or the actual return minus the rate ofinflation. Rising inflation has a negative impact on real rates of return, because inflation reduces the purchasing power of theinvestmentincome and principal.

Price RiskInvestors who need access to their principal prior to maturity have to rely on the avai lable m arket for thesecurities.Although investors in fixed-rate capital securities may take advantage of the exchange listing for retail offerings tosel l their shares prior to maturity, the price received may be more or less than the purchase price as a result of thesedynamic risk factors.

All information and opinions contained in this publication were produced by the Securities Industry and Financial MarketsAss ociation from our membership and other sources believed by the Ass ociation to be accurate and reliable. By providingthis general information, the Securities Industry and Financial Markets Association makes neither a recommendation as tothe appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particulainvestor. Due to rapidly changing m arket conditions and the complexity of investment decisions , supplem ental informationand sources m ay be required to make informed investment decisions .

2005-2013 The Securities Industry and Financial Markets Association

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