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They use the money to run their operations. In turn, you get back a set amount of interest once or twice a year. If you hold bonds until the maturity date, you will get all your money back as well. When interest rates fall, bond prices rise. This is a risk if you need to sell a bond before its maturity date Maturity date The date when an investment becomes due. On that date, you get your money back without any penalty. Any interest payments stop.
You may end up selling the bond for less than you paid for it. This is the risk that the return you earn on your investment Investment An item of value you buy to get income or to grow in value. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index. Inflation risk Inflation risk The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation.
This is the risk that the entire bond market declines. If this happens, the price of your bond investments will likely fall regardless of the quality or type of bonds you hold. If you need to sell a bond before its maturity date, you may end up selling it for less than you paid for it. This is called credit risk Credit risk The risk of default that may arise from a borrower failing to make a required payment. Sometimes, the issuer Issuer An organization that offers securities for sale to investors.
Examples: corporations, investment trusts and government bodies. Learn more about the factors that affect bond prices. Canadian federal and provincial bonds generally have low credit risk. Or, a fee you get to lend it. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest.
It uses your money until you need it back. The bonds with the highest credit risk are high-yield bonds , issued by companies with low credit ratings. However, despite the ratings, there may be times when the entity is not in a position to repay its contractual obligations on time. The risk of the bond issuing entity not being able to repay its obligations is what is known as default risk. Despite the risks involved, investing in bonds can all help you create wealth in the long-term. This way, you can make informed decisions.
You can open a demat account for free within minutes. Open an Account. What Are the Risks of Investing in a Bond. What is the risk that you are taking when investing in bonds? Interest rate risk Bonds are mostly fixed income securities, meaning that they offer a fixed rate of interest throughout their term.
Default risk Bonds are generally rated by credit agencies. Importance of including Fixed Income instruments in your portfolio Read More. View all blogs. Ready to invest with us?