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Generally, bond risk refers to the possibility that the issuer will default (not repay). This is also called "credit risk" or "repayment risk". In a addition, bonds face "Interest Rate Risk", rising interest rates will make the value of a set of fixed future cashflows decline in current value. These are the 2 core risks faced.
In addition to credit risk, there are other risks associated with bonds, just as there are risks with owning any asset. Every asset has some risk whether that's your house, car, art collection, stocks or that Baseball card collection in your attic. Bonds are no different. Some of the more common risks associated with bonds are credit risk (discussed above), interest rate/ market risk, call risk, liquidity risk and regulatory risk.
To determine credit risk, investors often look to a bond's rating, issued by independent ratings agencies such as Moody's, Fitch and Standard & Poors. The safest bond (in terms of repayment risk) is AAA-rated, and includes US Government debt and some highly rated corporate debt. A corporate or government bond issue rated AA or A+ is generally considered a safe investment. One rated BB or B- is riskier. Bond yields reflect this risk and generally lower rated bonds have higher yields than those of better credit quality.
Added by Stox723......There is another risk of Bond ownership. It is called "Opportunity Cost." This means that if you invest in a 10 year 5% Bond, you will receive 5% interest payments for 10 years. If you invest, lets say $10,000 in a Bond you will receive $500 per year in interest (usually paid semi-annually). Opportunity cost means that for this specific $10,000 there were other possible investments which you now cannot buy into with this money. The difference between the $500 earned and the income from the other possible investment is your opportunity cost.
Added by Beaufer99 (www.davidandgoliathworld.com). Aside from Default risk as described above, the important risks to an investor from holding bonds are as follows.
- Credit Spread Risk. The risk that the credit spread of a bond (extra yield to compensate investors for taking default risk), which is inherent in the fixed coupon, becomes insufficient compensation for default risk that has later deteriorated. As the coupon is fixed the only way the credit spread can readjust to new circumstances is by the market price of the bond falling and the yield rising to such a level that an appropriate credit spread is offered.
- Interest Rate Risk. The level of Yields generally in a bond market, as expressed by Government Bond Yields, may change and thus bring about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly appropriate levels.
- Liquidity Risk. There may not be a continuous secondary market for a bond, thus leaving an investor with difficulty in selling at, or even near to, a fair price.
- Supply Risk. Heavy issuance of new bonds similar to the one held may depress their prices.
- Inflation Risk. Inflation reduces the real value of future fixed cash flows. An anticipation of inflation, or higher inflation, may depress prices immediately.
- Tax Change Risk. Unanticipated changes in taxation may adversely impact the value of a bond to investors and consequently its immediate market value.
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Do treasury bonds have a high risk?
treasury bonds are risk free bonds.
Are bonds a high risk or low risk?
Low risk
What factors will contribute to the riskiness of these bonds?
Assuming that these bonds are just like any bonds, the biggest risk associated with investing in bonds is interest rates falling. Another risk is that the issuer will default on the bond. This generally does not happen with government bonds. Interest rates are the biggest contributor to risk in investing in bonds.
Why are government bonds generally considered risk-free?
They are considered credit "risk free" because the government can always print money to repay bond holders. It doesn't mean thay will! The reality is that there is a degree of credit risk, although generally small, but the government bonds do exhibit other risks (such as interest rate risk).
What is the risk in selling bonds?
no risk involved, its like putting money in the bankl
Do treasury bonds have a high risk?
treasury bonds are risk free bonds.
What type of bond has the highest risk?
High risk bonds are called junk bonds.
Are bonds a high risk or low risk?
Low risk
What factors will contribute to the riskiness of these bonds?
Assuming that these bonds are just like any bonds, the biggest risk associated with investing in bonds is interest rates falling. Another risk is that the issuer will default on the bond. This generally does not happen with government bonds. Interest rates are the biggest contributor to risk in investing in bonds.
How risky are junk bonds mutual funds?
Extremely Risky. Some of the risks involved in investing in Bonds are: 1. Interest Rate Risk 2. Re-investment Risk 3. Call Risk 4. Default Risk & 5. Inflation Risk The Default Risk is the highest risk factor wherein you may not get your money back and in case of Junk Bonds this is extremely high, that is why they are called Junk Bonds Junk Bonds refer to Bonds issued by company's with low creditworthiness and past history of default in payments
Why are government bonds generally considered risk-free?
They are considered credit "risk free" because the government can always print money to repay bond holders. It doesn't mean thay will! The reality is that there is a degree of credit risk, although generally small, but the government bonds do exhibit other risks (such as interest rate risk).
Why junk bonds pay a higher interest rate than government bonds of similar maturity?
Interest rates increase as perceived risk increases. Government bonds have virtually no risk. Junk bonds are so called because they carry a high risk of default.
What are the disadvantages of bonds?
To have a bond is to loan money to the issuing corporation. Some risk may occur in having bonds. These are the Inflation risk, liquidity risk and the lower returns.
What is the risk of just selling bonds not buying?
In this scenario, there is no risk: if you sell bonds without buying any more, you will eventually run out of bonds, causing your income stream to cease.
What is the order of treasury bonds junk bonds and corporate bonds from lowest to highest risk of default?
-U.S. Treasury bonds -Corporate bonds -Junk bonds
What is the risk in selling bonds?
no risk involved, its like putting money in the bankl
What is the risk involved with high yield bonds?
The major risk with high yield bonds is losing all of your money you invest. These type of bonds have a very low rating much lower that the investment grade.
