Bonds are generally seen as safer than shares. But no investment is absolutely guaranteed. Although the issuer of a bond promises to pay the coupon over the life of the bond, and repay the original investment at maturity, you could still lose money.
Below, we’ll run you through the main types of bond risks and help you answer the question, are bonds safe? Elsewhere you’ll also find information on the specific risks and what to keep in mind for gilts and government bonds and corporate bonds pages.
Default risk
This is the risk that the issuer isn’t able to repay the original loan and interest payments.
If a company does go bust, bond investors are ranked higher than equity investors (shareholders) for repayment of funds. But even so, there’s no guarantee that there will be cash available to do so.
When considering whether to invest in a bond, it’s important to look at the creditworthiness of the issuer. Some institutions or companies may be more of a credit or default risk than others. Credit rating agencies analyse, measure and report their view of the credit risk of a bond issuer and the bonds it issues.
Although credit ratings can be useful, they aren’t a recommendation and are subject to change. Movements in bond prices usually happen quicker than changes in credit ratings.
Interest rate risk
The opposite can also be true – if interest rates are going down, the fixed coupon of the bond starts to look more attractive to investors, particularly over the long term. This could generate demand for longer-dated bonds, causing their price to rise at a quicker rate than shorter dated bonds offering the same coupon rate.
Inflation risk
Inflation erodes the purchasing power of money over time, and that applies to the fixed interest coupons paid by bonds, too. When inflation is increasing (or inflationary expectations are increasing), bonds can start to look less attractive, and demand may fall – leading to changes in market prices.
Like with interest rates, the price of bonds with longer time to maturity can be more sensitive to inflation than shorter-dated bonds.
Currency risk
If you buy bonds denominated in another currency, the return you get in pounds will be affected by changes in exchange rates.
Learn more about investing in bonds
Corporate bonds
What are corporate bonds, and why do investors choose them?
Measuring returns
Learn how changes in bond prices can affect your returns.
Government bonds
Understand the different types of bonds and how they're measured.
FAQs
Bonds are considered as a safe investment & also come with some risks which are Default Risk, Interest Rate Risk, Inflation Risk, Reinvestment Risk, Liquidity Risk, and Call Risk. Investors who like to take risks tend to make more money, but they might feel worried when the stock market goes down.
What is the major disadvantage of investing in bonds? ›
Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
Which type of risk is most significant for bonds? ›
Interest rate risk is the most important type of risk for bonds. It is the risk between the events of reduction in price and reinvestment risk. This type of risk occurs as a result of the changes in the interest rate. Interest rate risk is avoidable or can be eliminated.
Why are bonds not a good investment? ›
Bonds are sensitive to interest rate changes.
Bonds have an inverse relationship with the Fed's interest rate. When interest rates rise, bond prices fall. And when the interest rate is slashed, bond prices tend to rise. Surprise increases or decreases could create temporary instability.
What is downside risk of a bond? ›
Downside risk is the potential for your investments to lose value in the short term. History shows that stock and bond markets generate positive results over time, but certain events can cause markets or specific investments you hold to drop in value.
Are bonds safe if the market crashes? ›
Where is your money safe if the stock market crashes? Money held in an interest bearing account like a money market account, a savings account or others is generally safe from losses stemming from a stock market decline. Bonds, including various Treasury securities can also be a safe haven.
Are bonds guaranteed returns? ›
Bonds carry the promise of their issuer to return the face value of the security to the holder at maturity; stocks have no such promise from their issuer. Most bonds pay investors a fixed rate of interest income that is also backed by a promise from the issuer.
Are bonds a safe investment right now? ›
I bonds issued from May 1, 2024, to Oct. 31, 2024, have a composite rate of 4.28%. That includes a 1.30% fixed rate and a 1.48% inflation rate. Because the U.S. government backs I bonds, they're considered relatively safe investments.
What is a con of a bond fund? ›
The downside to owning bond funds is: The management fee: Management fees for the more actively traded bond funds can be higher, which may lead to lower returns.
Can you lose money investing in bonds? ›
You can lose money on a bond if you sell it for less than you paid or the issuer defaults on their payments. When you buy or sell a bond, the commission is built into its price. The investment firm marks up the price of the bond slightly to cover the costs of selling the bond.
Holding bonds vs. trading bonds
If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
What are the riskiest bonds? ›
High-yield bonds face higher default rates and more volatility than investment-grade bonds, and they have more interest rate risk than stocks. Emerging market debt and convertible bonds are the main alternatives to high-yield bonds in the high-risk debt category.
Why bonds are not safe? ›
The problem is that the low risk associated with investing in high-quality government debt only applies in the very specific circ*mstance of you holding your bonds to maturity. Only then do you benefit from their fixed value at redemption.
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
May 7, 2024
Call risk is the likelihood that a bond's term will be cut short by the issuer if interest rates fall. Default risk is the chance that the issuer will be unable to meet its financial obligations. Inflation risk is the possibility that inflation will erode the value of a fixed-price bond issue.
Do bonds have high risk? ›
Less volatile price. Bonds tend to be much less volatile than stocks and move in response to a number of factors such as interest rates (more below). Less risky than stocks. Bonds are less risky than stocks, and are among the best low-risk investments.
Are bonds riskier than stocks? ›
Given the numerous reasons a company's business can decline, stocks are typically riskier than bonds. However, with that higher risk can come higher returns. The market's average annual return is about 10%, not accounting for inflation.
What is a primary concern for investors when it comes to bonds? ›
one key risk to a bondholder is that the company may fail to make timely payments of interest or principal. If that happens, the company will default on its bonds. this “default risk” makes the creditworthiness of the company—that is, its ability to pay its debt obligations on time—an important concern to bondholders.
