Default-free bonds can still have:a. Price change risk b. Interest rate risk c. Marketability risk d. Political risk e. All of the above
The correct option would be All of the above or e.
A default free-bond is one where the owner of the bond is assured when the bond is issued of getting the interest which was specified when the bond was issued and the principle when the bond expires.
This fact though, does not eliminate all risks associated with the ownership of bonds. The price of a bond is dependent on many variables, some of which include a change in the prevailing interest rate. A bond holder would not be able to find a buyer willing to buy the bond for the price it was initially purchased at if the interest rates have gone up.
The marketability risk occurs when the holder of the bond cannot find a buyer for the bonds held due to any reason. Perhaps people are now more interested in investing in the stock market and the amount allocated to buy bonds has been reduced.
Political risk could be a coup or a revolt in the country that has issued the bond. New investors are now not confident that the economy of the country would remain stable to assure that the interest and the principle on the bond will be received on time in the future. To accommodate for the extra risk, the marketable price of the bond comes down.
In spite of a bond being default-free when it was bought, there are still many risks associated with it.