Sep 28, 2010

Risks of investing in Bonds

Risks of investing in Bonds

Risks of investing in Fixed Income Securities

While generally considered safer and more stable than stocks, fixed income securities have certain risks:

Market risk

As with stocks, a bond’s value will fluctuate with changing market conditions, including the forces of supply and demand and interest rate changes – when interest rates rise, bond prices fall. However, the fact that bonds have maturity dates makes market risk a concern only if the investor decides to sell the bond before the maturity date.

Credit risk

The risk that the issuer may not be able to meet its obligations in terms of coupon payments or may not be able to pay the principal amount back to the investor at maturity. Also known as default risk or issuer risk.

Liquidity risk

The risk of not being able to execute a trade at the time the investor desires, or being forced to accept a significantly discounted price at the time the investor wishes to sell.

Foreign exchange risk

When the fixed income security is priced in one currency (e.g. US Dollar) and is different from the functional currency of the investor (e.g. Singapore Dollar), the investor is exposed to fluctuations in foreign exchange rates, which may increase or erode investment returns on the fixed income security.


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