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Types of Bonds

Investor Risks

The wide variety of GSE debt structures require a level of investor sophistication and awareness. Different structures behave differently when interest rates, yield curve shapes, exchange rates and/or other market indices change.

Typically, structured debt securities preserve investors’ principal if purchased at par and held to maturity. However, some structured securities add features that can accelerate final maturities and place interest flows, and in some cases principal, at risk. Certain structures have become common, while others remain unique in both issuance and investor applicability.

As the variations expand, it is crucial that investors know exactly how the instrument is affected by market changes.

Investors should fully understand the price sensitivity and performance characteristics of the instrument they are considering, and make a complete analysis of both potential risks and benefits. The key to success in this market is to be fully aware of all the characteristics of the particular instrument and to understand how the security will react to changes in relevant market rates and in combination with other portfolio holdings. Once investors purchase these securities, they should also monitor their performance continuously.

Furthermore, certain MTN issues can have limited liquidity. Certain structured securities have a narrower base of potential investors, because securities that have been structured for a particular investor’s needs may not match the needs of other investors. With such products, buyers in the secondary market may be much more difficult to find.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.