What is Incident Risk?

Incident risk takes place that affects the interest and/or principal payments on bonds. There are many examples of this variety of risk but most analysts categorise them as follows:

  • Regulatory risk. Laws or regulations may change that affect the status of a security and therefore its rate. For example, in some countries government bonds of a maturity of 3 years or less rank as liquid assets for banks (who are required to hold a certain minimum of these); if this status changes, the supply of these securities will increase, driving up the rate (driving down the price).
  • Political risk. A new government may alter the terms and conditions of repayment of existing issues of bonds.
  • Disaster risk. A company may be affected by a natural disaster (e.g. an earthquake), which could impair its ability to pay the interest on and/or principal of its issued bonds.
  • Takeover risk. A company may be taken over and this could prejudice its obligation to bondholders.