Risks Associated with Buying Bonds

Bonds are, by comparison to others, a secure investment.  There are, of course, some that have greater bond risk than others. Foreign bonds contain some of the highest risk depending on the sovereign entity one buying a bond from.

Apart from Moody’s rating system, there are other ways to determine bond risk

  • Stability of the bonds currency
  • Government stability
  • Current events, both global and domestic.

The currency of a bond is a factor that makes a bond more or less risky. The rate of return for domestic bonds tends to be on the current market return.  For bonds, some of which mature after decades, there is the risk of inflation diminishing the worth.  All bonds carry the risk of a loss of principal when interest rates rise.

One can also look at the current events to simulate the risk of a government bond.  Instability of the government can make the bond less appealing, and make it a riskier investment.  Take for example how on May 24, 2010 Spain seized a “troubled regional bank.”  This instability creates uncertainty and a lack of trust in the government’s ability to repay debts.  Being part of the European Union (EU), this affects all of its members, and makes uncertainty arise across all of its members.  Unlike the American government, which can print more money if there is trouble paying the owed bond, the government cannot print more money, since it is not just their currency.

Another recent event that could show a bond being more risk than one would expect would be the labor strike in Greece, along with its international rescue loans worth $140 billion. Bailouts of this kind cause trust to dissolve in the government.  Though the fear of a government in established governments is next to nothing, the fear of power change and policy shifts could do the same as far as impact on ones investment is concerned.

To sum up, the bonds of today harbor some risk, as any investment does.  Even in the stability of the United States, there is concern of inflation rising reducing bond worth.