Are there Risks with Buying Bonds? |
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Answer:
While bonds are generally considered a safe The first type of risk is known as “interest rate risk.” When interest rates are rising, bond prices usually fall. When interest rates are falling bond price usually move up. Keep interest rates and interest rate risks in mind when investing in bonds. Another type of risk is the risk that the bond’s issuer will default. This type of risk varies with the different bond issuers. The U.S. Treasury’s bonds carry very little risk because the federal government backs them. Municipal bonds issued by states and local governments are dependent upon the financial health of the bond’s issuer. Corporate bonds are reliant upon the company’s balance sheet, earnings, and income statements. Some bonds have what is called a “call risk.” If a bond is callable by the issuer, the issuer can buy back the bonds at a “call” price before the bond matures. Reduced purchasing power is a risk that can affect bonds. When inflation goes up, the bond’s fixed interest payments remain the same, reducing the purchasing power of these dollars due to inflation. Know the most common risks when purchasing bonds so that you can make an informed decision.
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