Is investing in bonds risky? What are the risks of investing in bonds?? Find out now in this article to have an effective and safe financial strategy.
I/ What is bond investment? Why are many investors interested in bonds?
- What is bond investment?
A bond is a type of security that represents a debt owed by the issuing organization (business, government, bank) to the owner. When you buy a bond, you are lending money to the issuing organization and in return they promise to pay periodic interest and repay the principal amount to you when the bond matures.
Bonds have a fixed maturity, which can range from one year to several decades, and the interest rate is usually agreed upon before issuance.
- Why are many investors interested in bonds?
Many investors, especially those looking for safety and stability, are interested in bonds for the following reasons:
- Stable profit: Bonds typically provide a fixed return through a pre-agreed interest rate, providing investors with a stable source of income, especially those who do not want to face strong fluctuations from other asset classes such as stocks.
- Lower risk than stocks: Bonds are considered safer than stocks, especially government bonds or bonds of large enterprises. When a company issues bonds and then goes bankrupt or cannot repay its debts, the assets of the company will be sold to pay off its creditors. In this process, bond holders will be given priority in receiving their money back before shareholders – those who hold the company’s shares. This is the reason why investing in bonds is considered to have a lower level of risk than investing in stocks.
- Diversify your portfolio:Bonds are a useful tool to reduce risk in portfolioInvestors often combine investing in bonds with stocks or other assets to ensure the safety of their capital.
- High flexibility: Investors can choose bonds according to different maturity dates, interest rates, or risk levels, making it easy for them to find financial products that suit their personal goals.
Bonds bring stable returns but still have potential risks, requiring investors to consider carefully before choosing.
II/ Is investing in bonds risky? What are the risks of investing in bonds?
>>> See more articles: What are bonds? Guide to buying bonds and risks to know
- Is investing in bonds risky?
Although bonds are generally considered a safer financial instrument than stocks, they are not without their risks. bond risk. If you ask whether investing in bonds is risky? the answer will be yes. However, the level of risk depends on the type of bond, the issuing organization and various economic factors. To avoid unwanted losses, investors need to understand the potential risks of bonds when they want to invest in it?
- What are the risks of investing in bonds?
Credit risk (default risk):
This is the biggest risk when investing in bonds. It occurs when the bond issuer (corporate or government) fails to pay interest or repay the principal on time. Credit risk is higher for corporate bonds, especially those with low credit ratings. If the company goes bankrupt, the investor may lose some or all of the money they put into the bond.
Credit risk is the most important factor, especially with corporate bonds with low credit ratings.
Interest rate risk
Interest rates have a direct impact on the value of bonds. When market interest rates rise, the value of existing bonds will fall because new bonds will offer higher yields. Conversely, when interest rates fall, the value of old bonds will increase. For investors who need to sell bonds before maturity, interest rate risk is an important factor to consider.
Liquidity risk
Liquidity risk occurs when an investor is unable to resell a bond in the secondary market quickly or at a desired price. This may result in having to accept a lower price, resulting in financial loss for the investor. Corporate bonds are more exposed to this risk than government bonds.
Inflation risk
Inflation is a factor that reduces the purchasing power of money over time. When inflation increases, the real value of bond yields can decrease, especially for fixed-rate bonds. This is the inflation risk that bond investors need to face.
Reinvestment risk
Reinvestment risk occurs when interest rates fall and an investor is unable to reinvest the interest or principal received from a bond at the same rate as the original. This can reduce the expected return from a bond investment, especially when the bond matures in a low interest rate environment.
III/ Distinguishing the risks of investing in bank bonds and corporate bonds
When investing in bonds, investors have many options, the most popular of which are bank bonds and corporate bonds. Although both types of bonds offer the opportunity for stable returns, each type has a different level of risk.
Distinguishing between bank bond risks and corporate bond risk will help investors better understand the differences in safety, liquidity, and potential factors that may affect their investments. Here are the differences between the two types of bonds:
Interest rate fluctuations affect both bank bonds and corporate bonds, but the degree of impact is clearly different.
- Risks of investing in bank bonds:
Bank bonds are often considered to have a higher level of safety than corporate bonds because banks are financial institutions that are strictly regulated by state agencies. However, when investing in bank bonds, investors still face certain risks:
- Credit risk: Although this risk is quite low because banks are usually financially stronger than regular businesses, there are still cases where banks can experience financial crisis or become insolvent.
- Interest rate risk: Like all other types of bonds, bank bonds are also affected by fluctuations in interest rates. When market interest rates rise, the value of bank bonds can fall, causing investors to lose the value of their assets if they sell before maturity.
- Liquidity risk: Bank bonds are often more liquid than corporate bonds because banks are often reputable institutions and have many interested investors. However, with some small banks or in less active market conditions, investors may still have difficulty selling bonds quickly.
- Management risk: Banks’ capital and risk management regulations and requirements are quite strict. However, if banks do not comply with these regulations, they may face the risk of being prosecuted or incur financial losses, thereby affecting their ability to repay investors.
- Risks of investing in corporate bonds
Corporate bonds are riskier than bank bonds because businesses typically have lower financial strength and reputation. Risks of investing in bonds businesses include:
- Credit risk: This is the biggest risk when investing in corporate bonds. If a company experiences financial difficulties, it may become insolvent or go bankrupt, putting the investor at risk of losing some or all of his investment. Small, new, or low-rated companies are more likely to have this risk.
- Interest rate risk: Corporate bonds, like bank bonds, are also affected by market interest rates. However, due to their higher risk, corporate bonds typically have higher interest rates to compensate investors and therefore, interest rate fluctuations can have a stronger impact.
- Liquidity risk: Corporate bonds are often less liquid than bank bonds, especially those of smaller or lesser-known companies. This makes it difficult for investors to resell the bonds on the secondary market and may result in lower prices than expected.
- Business risks: In addition to credit risk, investors also face risks related to the business operations of the enterprise such as poor management, market fluctuations, policy changes or internal problems. These factors can affect the profitability and ability of the enterprise to repay debts.
On the investment journey, it is important to have a clear awareness and understanding of the Risks of investing in bonds is an important factor that helps investors make reasonable decisions. Although bonds are considered a safer choice than stocks, there are still many potential risks such as credit risk, interest rate risk and liquidity risk. HVA Group committed to accompanying you on your investment journey, providing the necessary information and knowledge so that you can effectively manage risks and optimize profits from your investments. Let's explore more safe and potential investment opportunities with us!
