Risks Associated With Investing In Bonds

Chapter 1: Investing In Bonds
Chapter 2: Risks Associated With Investing In Bonds
Chapter 3: Where To Invest In Bonds

Although most of the bonds in the market are not high-risk, it is quite possible to lose the money invested in them. The returns on bonds may be fixed, but cannot be guaranteed when influenced by factors like inflation, market slump etc. Here are a few common risks you may face when you invest in bonds.

Inflation Risk – Returns from bonds get affected because of inflation as the earned interest may not be able to beat inflation.

Interest rate risk – When you take a long-term bond, you face the risk of fluctuating interest rates. The interest rates and the bond prices are inversely related, which means that if the interest rates increase, the bond prices fall and vice versa.

Call back risk – Sometimes the issued bonds are called back or redeemed by the issuers, who maintain a right to do so in an attempt to lower their costs when interest rates go down. In such a case, you may get only the at-par value of the bond which could be lesser than the market price.

Credit risk – This kind of risk arises if you have invested in bonds issued by companies, which may be unable to make the payment at the time of maturity. Junk bonds have the highest credit risk while US treasury bonds have almost zero credit risk.

Liquidity risk – Unlike stocks, you may have to hold your bond until it matures to get decent returns from the investment. Even though you can trade the bonds issued by the US government, it could be difficult to sell junk corporate bonds.

Market risk – Like other assets, bonds are also affected by the demand-supply balance. If you have a popular or lesser available bond in the market, you may get a good price for it; otherwise, you may have to keep it until maturity for a decent return.

Next Chapter: Where To Invest In Bonds