What are various risks involved in bond investment, and what are recommendations for techniques to reduce these risks?
Investment in bond assures the investor a fixed return with some element of risk.
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Bonds are considered the least risky investment apart from putting your money in the bank. But to say that bonds carry no risk at all is not correct. There are three risks in bond investment. First, there is the risk that bonds may default. This scenario is highly unlikely but, in our changed economic climate, it needs to be said. For example, cities and states are running out of money and they may need bailouts. Second, bonds may have low interest rates, even if they are steady. This can be a risk as well in view of inflation. So, for example, if the price of oil rises and this causes everything that needs to be transported to become more expensive, then the yield in the bond may not be big enough to counter the inflation. This is a real possibility in our world. Finally, you may be locked in to a bond when other investments have much more potential to go up in value. How do you reduce risks? Two things: Education and diversification of your investment portfolio.
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