As a rule, bond prices and interest rates move inversely to each other, with bond prices falling as interest rates rise. This is because as interest rates rise, investors will sell off bonds in favor of debt with higher coupon rates. For example, an investor pays $1,000 for a bond with a 3% coupon rate when interest rates are 3%. The bond has a 3% yield to maturity. If interest rates rise to 4%, the bond's price would need to fall to $925 to achieve a 4% yield to maturity in line with prevailing rates.
Because bonds are a form of debt, the bondholder is exposed to the risk of the debtor defaulting. Moody's Investors Service, Standard & Poor's Global Ratings and other bond-rating agencies publish ratings that assess the likelihood of default for individual bonds on the market. There are two main divisions: investment grade and non-investment grade. Non-investment grade bonds carry a higher credit risk, but usually pay higher yield to compensate.
Inflation can be harmful to investors in fixed-income securities because their yield is a fixed amount, while inflation is ever changing. In case of inflation, the real value of the yield falls and investors may even lose money in inflation-adjusted terms on a fixed-income investment. One way to deal with inflation risk is to invest in U.S. Treasury Inflation-Protected bonds (TIPS). The principal of these bonds is adjusted for inflation when paid out to the bondholder.