Risks Associated with Corporate Bonds
Compared with other financial securities, many types of bonds may be considered to be a relatively stable investment, but that doesn’t mean they’re not subject to risk, such as:
- Interest rate risk: Bonds have an inverse relationship with interest rates. When rates rise, bond prices fall, which is why longer-term bonds carry higher coupons as compensation
- Inflation risk: As prices rise, purchasing power declines, which means the value of a bond could deteriorate over time.
- Default risk: as stated above, in the event a company declares bankruptcy, bondholders may or may not be compensated depending on their priority and whether their bonds are secured.
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