Understanding bonds
Bonds are debt or fixed income instruments issued by governments and corporates. They typically represent loans to the issuer to finance a project or company operations.
When you buy a corporate bond, for example, you are lending money to the company, which will typically pay you an interest rate or coupons.
Risks
The risks most often associated with bond investing are
Interest rate risk
• When interest rates rise, bond prices tend to fall.
Reinvestment risk
• When interest rates fall, investors must repurchase the bond at lower rates than previously.
Inflation risk
• When inflation is high, bond coupon payments can be eroded.
Credit/Default risk
• The risk of an issuer not being able to repay an investor’s principal.
Ratings risk
• Rating agencies may downgrade a bond issuer’s credit ratings, which could lower bond prices.
Liquidity risk
• Low liquidity or inability to buy and sell some bonds may make prices more volatile.
Things you should know
Important notice and disclaimers
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