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.
