Are Bonds Really Risk Free?
Enthusiasts say bond investing is a risk free venture. Some say it is low-risk. But how risky could the venture become?
Experts in the industry attest to the fact that bonds are low-risk. They are deemed volatile yet less risky compared to other common stocks. But it’s important to instill in the mind that there are some risks involved in bond investing and they can be broken down into 2 categories:
The first risk is called defaulting. In purchasing corporate bonds, the investor is essentially buying a claim to their assets. Sometimes taking on too many debts creates a scenario of difficulty in repaying. Eventually, it could lead to bankruptcy. Companies often opt to file bankruptcy and when they defaulted in the repayment of the principal debt. As such, the investor could literally lose the whole venture. Nonetheless, this occurrence seldom happens.
Another risk is known as changing interest rates. Investors do not only care about the interest rates in bonds but the interest rate of the current market. To circumvent this risk, you can buy the bond at a discount. The fact is the longer you hold the bond, the less likely you are to lose money on it.
To avoid risks, follow the rule of thumb which is to stay away from ‘junk’ bonds. Further, shun the opportunity of losing money on a bond; don’t purchase bonds when interest rates are pretty low. The higher the interest rate climbs, the lower is the chance that the price of your bond will drop.
