Risks involved with bond investments | Fusion - WeRIndia

Risks involved with bond investments

Risks involved with bond investments

Generally, bond instruments, also known as debt instruments, are considered as safe investments. However, it is important to note that there is always a chance of risk in most investments. It is true that investing in bonds in less risky when compared to equity investments. Here are some risks that exist with bond investments.

Interest rate risk

Bond prices and interest rates are inversely related. This means that any changes in interest rates will make an impact in bond prices. If interest rates were to increase, there will be a decrease in bond price and vice-versa.

Call risk

There are certain bonds where there is an option of the issuer calling for bond before maturity. If there is reducing interest rate regime, the bond issuer may call for the bond in order to protect them from interest rate drop.

Re-investment Risk

The bondholder can be exposed to risk of investing the proceeds of the bond at lower interest rates after the bond is called. This is called re-investment risk which occurs after bonds are called by issuer. The bondholder can end up with a lot of money and he/she may not fetch the required returns.

Inflation risk

When bondholders receive fixed payment called as coupon for the duration of the bond held, the inflation could destroy returns.

Credit or Default Risk

Buying a bond is basically receiving a certificate of debt from issuer. It should be noted that corporate bonds are not guaranteed. Before buying a bond, their ratings should be considered which will let the buyer know regarding the risk on the bond.

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