subject: A Bond Is Certainly Definitely Not A Completely Risk Free Investment [print this page] Major reasons why people like investing in a bond is that they hope that such instruments will help them earn good money and it can also help them preserve their capital. Although this is a good reason to invest in such instruments, too many times investors fail to understand or realize that such investments have some risks associated to them. So, it makes sense to not just blindly put your money into any such instrument and instead you should learn about the possible ways in which your investment can boomerang on you.
An important factor related to the bond is that you need to realize that there is an inverse relationship between the interest rates and the instruments price. As the interest rates rise there will be a corresponding fall in the price of the instrument and vice versa. This in turn means that until the instrument is redeemed (matures) you will notice that its price will fluctuate in tune with the existing interest rates.
Unfortunately, it is not possible to protect yourself against this form of volatility which means that before investing you need to be prepared for the fact that you may need to hold on to your instrument till such time as it is matured. If you try selling the instrument before it has matured there is a risk that you will suffer losses, especially when the interest rates turn negative.
Even for people that are filing for bankruptcy, there is need for them to understand that the investor in the bond has first preference in regard to claiming the asset. So, as the holder you will need to wait till the investors claims are satisfied and then you can get your money back.
There are also subordinated debentures which will be ranked higher than ordinary stocks but are not ranked as high as the senior notes. It is therefore necessary to be sure about the kind of bond that you hold.
Also, be careful to understand that being the owner of the instrument does not in any way guarantee that it will help you earn money. So, do not take anything for granted.
Lastly, these instruments prices will fluctuate up and down. So, before purchasing these instruments be sure to check the issuers history to know for sure that the instrument is strong and will prove to be profitable rather than loss making.
