The 5 Biggest Bond Risks

Bonds are great conservative investments that offer lower, but more safe yields. But being more safe does not mean there is no risk. Here are five examples of bond risks:

Interest rates and bond prices carry an inverse relationship- As interest rates fall, the price of bonds generally rise and vice versa.

Reinvestment risk- Having to reinvest proceeds at a lower rate than the funds were previously earning.

Inflation risk- If inflation increases dramatically, investors will see their purchasing power erode and may actually achieve a negative rate of return.

Credit/Default risk- If the bonds (certificates of debt) are not repaid, then the investors lose their initial principle. Corporate bonds are not guaranteed by the full faith and credit of the US government. 

Liquidity risk- Risk that an investor might not be able to sell his corporate bonds quickly due to a thin market.