While more publicity is given to risk in the stock markets, there are a number of risks associated with investing in bonds:

  • Call risk - When interest rates fall, a callable bond is more likely to be called in, and the investor would have to replace it with a lower-coupon bond.
     
  • Reinvestment risk - This can refer to reinvestment of principal after a bond is called, as well as reinvestment of the dividends from a high-coupon bond into a lower-rate investment.
     
  • Credit risk - This refers to the possibility that the bond issuer will not be able to make expected interest rate payments and/or principal repayment.
     
  • Interest rate risk - If interest rates rise, the market value of the bond will decline. This is less of an issue if the investor can hold the bond until it matures.
     
  • Purchasing power risk - Also known as inflation risk, this refers to the very real possibility that as inflation increases the purchasing power of the bond income will decrease.
     
  • Liquidity risk - This refers to the marketability of the bond. Certain issuers may be less marketable than others.
     
  • Event risk - Any number of events can affect the credit-worthiness of the issuer. Leveraged buyouts, corporate restructurings, mergers and acquisitions, and bankruptcies can all have a negative impact on a bond's price.
     
  • Opportunity cost risk - This refers to the potentially higher rate of return an investor could earn if the money used to purchase a bond were placed in an alternate investment.
     
  • Currency risk - Also known as exchange risk, this risk applies only to foreign bonds.

Before we delve into duration, the primary measure of bond risk, we recommend a read of the following tutorials. If the topic of bonds is unfamiliar to you, or you need a brush up on their basics, see our Bond Basics Tutorial.

If you are fairly familiar with bonds, move on to our Advanced Bond Tutorial , which focuses on bond fundamentals such pricing, yield, and duration.

Note that the inclusion of these tutorials is so you better understand the concept of duration. You will most likely not be asked bond-specific questions on your Series 66 exam. (You will need to know this material for your Series 7 exam, however).



Duration and Stock Risks

Related Articles
  1. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  2. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  3. Investing

    How to Manage Risk With Bonds in Your Portfolio

    Bonds are not immune to risk, so be sure to diversify your portfolio with proper asset allocation.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Investing

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  6. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  7. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
  8. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center