Question: What is a political risk for a bond?
Answer: A bond while invested is non-taxable but later on some political decision the bond is declared as taxable. Then yield on the bond would be highly affected and adversely affect the bond price.
Question: How municipal non-taxable bond would be affected if tax rate goes down?
Answer: Suppose you invested in a non-table bond, but tax rated reduces later on it would affect the bond price. Because the main characteristic of the bond is that it is non-taxable. But tax reduces by the municipalities. Which would affect the price of the bond and that reduces and finally yield on the bond would be affected as well.
Question: What is the legal risk on the non-taxable bonds?
Answer: Bonds are exposed to two types of political/legal risk you can also say tax risk. - If federal income tax rate will be reduced. If tax rate is high, the greater is the value of the tax-exempt nature of a municipal bond. If tax rates reduced, the price of a tax-exempt municipal bond will decline. - Suppose you invested in municipal bond which is tax exempt eventually will be declared taxable Which results is a loss of the tax exemption, the bond will decline in value in order to provide a yield comparable to similar taxable bonds.
Question: Can you give some example of the even risk for the bond investor?
Answer: Sometime, an issuer/borrower does not make interest and principal payments because of - A natural accident - Industrial accident - A takeover - Corporate restructuring. These risks are referred to as event risk. Few examples - Covid-19 affected the market and people are not able to make payment. - Cancellation of nuclear power plant. - Cancellation of the big water project. - Cancellation of toll road constructions etc.