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Investing in bonds is not
without risks. In fact, every investment in bonds carry some risks, although
the degree of risk varies with the type of debt and the issuer. The main
risk is the credit risk (or default risk). In this scenario, the issuer is
not be able to pay the interests and repay the principal in the
pre-established dates.
As a direct consequence, US
Government bonds will offer a lower yield than more risky bond issuers.
Indeed, US Government bonds are "absolutely" safe with no risk, then no big
returns can be expected.Another risk consists in the interest rate risk,
only if you do not keep your bond till maturity. We have already mentioned
this process in the previous section of this document: bond values are
varying with the interest rates in a simple way. During the high period of
the interest, if you sell your bonds (purchased at lower yield), you will
loose some money, only if you sell before maturity.
For bond holder (till maturity), a major risk is obviously driven by a
rising inflation, as it will have a corrosive impact on your bond
investment. Indeed, you lock up your money for a long period, then inflation
plays against you. Of course, the longer the maturity, the larger the impact
of inflation. Then, we expect some pair trades to be active between short
term and long term maturities during rising inflation periods.
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