What are the Risks in Bond Investment?
Even the risk of bond investing is lower than equity investing, but low risk does not mean no risk. Here are some common risks of bond investment :
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Interest Rate Risk - When you invest in bond, you will receive interest income on a predetermined rate, for example, 6 percent per annum. However, if market rate rises from 1 percent to 5 percent in the investment period, 6 percent interest per annum from bond seems less attractive. Higher interest rate leads to fall in bond price.
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Default Risk - Do you remember bond investment means loan your money to the bond issuer? If issue has financial difficulty or goes bankruptcy, investor may loss partial or whole investment amount. Investors can refer to issuer’s credit rating to access the default risk of the investment.
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Inflation Risk - Most of the bonds pay fixed amount of interest to investor regularly, interest rate income may not enough to cover the loss in purchasing power if consumer prices jump unexpectedly.
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