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

    Six Biggest Bond Risks

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

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  3. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  4. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  5. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  6. 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.
  7. Investing

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center