What are the risks of bonds?

📘 Briefly Explained

For private investors, bonds primarily carry **price risk**: when market interest rates rise, the prices of existing bonds fall, which can lead to losses if sold prematurely. There is also **credit risk**, meaning the risk that the issuer becomes insolvent and fails to make interest or principal payments. For bonds with long maturities, **inflation risk** is particularly high, as fixed interest payments can be eroded in real terms by rising prices. **Currency risk** is also relevant: investing in foreign currency bonds means exchange rate fluctuations can reduce returns. Finally, investors should consider **liquidity risk**, as some bonds can only be sold with difficulty or at unfavorable terms.

🔍 Why This Matters

Bonds are subject to price risk because rising market interest rates lead to falling bond prices, causing losses if sold early. There is also issuer risk, i.e., the danger that the debtor becomes insolvent and interest or principal payments default. This is relevant for private investors because bonds are often considered a safe alternative to stocks, but depending on the issuer’s creditworthiness, they can carry significant loss risks. Inflation also poses a risk, as fixed interest payments can reduce real purchasing power when prices rise.