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While generally considered safer and more stable
than stocks, bonds have certain risks:
Interest rate risk:
when interest rates rise, bond prices fall. If you need money and have to
sell your bond before maturity in a higher rate environment, you will
probably get less than you paid for it. Interest rate risk declines as the
maturity date gets closer.
Credit risk:
if the issuer runs into financial difficulty or declares bankruptcy, it
could default on its obligation to pay the bondholders.
Liquidity risk:
if the bond issuer?s credit rating falls or prevailing interest rates are
much higher than the coupon rate, it may be hard for an investor who wants
to sell before maturity to find a buyer. Bonds are generally more liquid
during the initial period after issuance as that is when the largest volume
of trading in that bond generally occurs.
Call risk or reinvestment risk:
If a bond is callable, the issuer can redeem it prior to maturity, on
defined dates for defined prices. Bonds are usually called when interest
rates are falling, leaving the investor to reinvest the proceeds at lower
rates.
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