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Dear John,
In one of the questions, it was saying that in relation to an irredeemable security paying a fixed rate of interest,
‘as risk rises, the market value of the security will fall to ensure that investors receive an increased yield’
Could you please explain the intuition behind it?
Thank you!
The market value is the present value of future expected receipts discounted at the investors required rate of return.
As risk increases, the required return will increase, and this will reduce the present value.
(If you want a higher rate of return, then you will pay less for the security)
I do suggest that you watch my free lectures on the valuation of securities where I explain all this, with examples.
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