Interest rate risk

Bonds pay income that can be fixed or floating, and the payments may be made periodically or at maturity. Most debt securities carry a coupon When interest rate falls, the bond value increases because coupon rates are higher than that of the new bonds being issued. Conversely, when interest rate rises, the bond value decreases. It is important to note that the longer the bond maturity, the greater the interest rate risk.

Inflation risk

Credit quality refers to the ability of the bond issuer to repay its debts. Credit assessment is usually conducted by credit rating agencies like Standard & Poor’s and Fitch Ratings. Bonds of better quality with credit ratings ranging from AAA to BBB are commonly referred to as investment-grade bonds. Investment-grade bonds may offer lower coupon rates because the risk of Since bond coupon rates are fixed, income from the bond can be eroded by inflation over time. The longer the term of the bonds, the higher the inflation risk.

Currency risk

If you invest in foreign currency-denominated bonds, you may be exposed to foreign exchange risk upon conversion to your home currency.

Risk of default of issuer

Bonds carry the risk of issuer default, which means that the issuer may fail to make further income and principal repayments, due to financial difficulties. In such instances, bondholders may stand to lose their capital. Default risks tend to be higher for corporate bonds, although governments can also default on their debt obligations.