Bonds are Risk Free

Bonds are indeed low in risks. These are considered not so risky and they are deemed more volatile than the ordinary stocks but it is valuable to comprehend that still there are few and small risks in bonds investments. The risks of the bonds can be divided into kinds or categories:

Risk Number 1 - Defaulting

When you purchase the bonds in the corporate sector, you are significantly purchasing some claim on the assets they own. Just like with individual persons, the corporations or companies also take on their debts and they hope to grow. There are times when the corporations take on so much or that their operations start to work very poor and then as a result they fail to pay the debts they owe. This can be compared to someone charging too much on the credit card they own then failing to pay and then filing bankruptcy later on. There are rare times when the companies will then file for the status of bankruptcy and they will fail to pay again the principal of the debts which means that the investors may lose all their investments even though this scenario is not very common.

Risk Number 2 - The Changing Interest Prices or Rates

When investing in bonds, one can choose to sell them on the market whenever they want. And just like the stock, each of the bonds carries a specific price which is assigned by the market. Since an investor may end up choosing to sell it in the open market, he or she has to consider that most people would care on what interest price does the bond pay and the interest price the market has as of that time.

Let's say that he or she owns a bond which pays six percent of interests and he or she wishes to sell the bond on a market that is open after a year and at that time the rate of interest is eight percent then he or she will consequently get a much lower amount than what he or she paid before since there is no logic why anybody would purchase the six percent bond if the eight percent bond is achievable thus the only alternative is to buy that bond at a discounted rate.

The much longer time one holds onto the bond, there will be more odds of losing more money on them thus bonds are usually an investment considered for the long term.

 

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