explain the two types of risk (interest rate and price) associated with bonds. explain why valuation models…

Brief Explanations:

1. Interest - rate risk in bonds: Interest - rate risk is the risk that changes in market interest rates will affect the value of a bond. When market interest rates rise, the value of existing bonds falls because new bonds are issued with higher coupon rates. Conversely, when market interest rates fall, the value of existing bonds rises.
2. Price risk in bonds: Price risk is related to the fluctuations in the market price of the bond due to various factors such as changes in credit quality of the issuer, overall market sentiment, and supply - demand dynamics in the bond market.
3. Stock valuation models vs market price: Stock valuation models are based on assumptions about future cash flows, growth rates, and discount rates. In reality, the market price of a stock is influenced by a wide range of factors including investor sentiment, short - term market trends, and unexpected news events. These non - fundamental factors can cause the market price to deviate from the value estimated by valuation models.

Answer:

1. Interest - rate risk in bonds is due to changes in market interest rates affecting bond values. Price risk in bonds is from factors like credit quality and market sentiment.
2. Stock valuation models rely on assumptions, while market prices are affected by investor sentiment and news events, causing discrepancies.