Bonds Risks

While bonds are safer compared to equities, they are not a completely risk-free investment. These include the following risks: 1. Interest Rate Risk: It has already been established that the price of bonds moves in an inverse relation with interest rates. This means that if interest rates are increased, then the market value of a bond will decline; consequently, sellers of such a bond before its maturity would suffer losses. 2. Credit Risk: The chance that interest or principal payments will not be made because the issuer defaults. For lower-credit-rated issuers, "junk" bonds, credit risk is higher, and so are yields to compensate for the increased risk. 3. Inflation Risk: Inflation reduces the value of money; thus, it diminishes the purchase power of the fixed interest received by the bond. If inflation moves higher than the coupon rate of the bond, then real return on the said bond decreases.