Liquidity & 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.Some of the bonds, especially those issued by small companies or less common governments, might not be very liquid since they cannot be easily traded. This may mean that when the owner of a bond wants to sell his bond, he may not be able to do so because no one is willing to buy from him at the price he wants.