Bonds are generally considered a safe investment, but specific risks also lurk in interest-bearing securities. These essentially include the following risks:

•     Credit risk,
•     interest rate risk,
•     termination risk and
•     currency risk.

The individual risks are explained in more detail below.

1) Credit risk

The credit risk is understood as the danger of insolvency of the bond issuer. Not least because of Greece, it became clear that even states can default on payments or have payment difficulties. An alternative term for credit risk is issuer risk.

Changes in creditworthiness can be caused by macroeconomic developments or changes in the company-specific environment. Rating agencies such as Moody, Standard & Poors and Fitch continuously check creditworthiness. The rating is used to assess the probability that a debtor will meet interest or redemption payments on time.

The basic rule is:

The worse the credit rating, the higher the nominal interest rate.

The nominal interest rate or coupon, which is higher than the current risk-free market interest rate, is the risk premium offered to investors to invest in the corresponding bond. Bonds with very poor credit ratings are also known as junk bonds or high yield bonds.

2) Interest rate risk

As mentioned in the first article of the series Bond Basics, the current market interest rate has a significant influence on the prices of bonds.

Fluctuations in the market interest rate can affect the price of the bond in one direction or another during its life. Market interest rates change based on current economic trends.

So why does the market interest rate influence the price development? The main reason is that the nominal interest rate is set in line with the market interest rate level prevailing at the time of issue. If the market interest rate changes after the bond issue, the price development will exactly compensate for this change.

For example, if the market interest rate rises, bonds that are newly issued have an advantage. So the demand or price will fall until the original relationship is restored.

Surf tip from exnessthai.com Inflation risk: ความเสี่ยงด้านเงินเฟ้อเกิดขึ้นเมื่ออัตราผลตอบแทน (เล็กน้อย) ของพันธบัตรน้อยกว่าอัตราเงินเฟ้อในเทอร์มินัล โหลด exness เพื่อให้ผลตอบแทนที่แท้จริงกลายเป็นลบ.

The inflation risk arises when the (nominal) yield of the bond is less than the inflation rate, so that the real yield becomes negative.

4) The call risk

The issuer has the right, if so agreed in the terms of issue, to unilaterally call the bond early. Bonds are often issued with this right in times of high interest rates. If market interest rates then fall, the issuer is likely to exercise its right to reduce its interest burden by issuing new bonds.

5) The currency risk

In the case of so-called foreign currency bonds, which are not quoted in euros, there is a currency risk in addition to the risks mentioned above. If the foreign currency appreciates against the euro, the profits increase. Conversely, however, a stronger euro can also significantly reduce returns.