4 risks involved in corporate bonds

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Corporate bonds are nothing but debt instruments issued by a corporation, the holder of which receives interest from the corporation periodically for a fixed period of time and gets back the principal along with the interest due at the end of the maturity period.

Though corporate bonds are less risky as compared to investments such as shares,they have their own risks. Some of the risks that you will be faced with if you investing a corporate bond are in a slide show below.

Credit Risk

This means that the company you are invest defaults on your in your interest payment or does not pay you back your principal.

Prepayment risk

In case your bonds contain clauses that allow the issuer to redeem the bonds before the due date, you will be faced with pre-payment risk. In such cases the company may redeem bonds when interest rates go down and the price of the bonds go up. Means you will get the face value of the bond when the market value of the bond is higher than the face value and you tend to loose the difference.

Interest Rate risk

When you invest in listed bond, you have to face the risk of interest rate going up and down and the resultant change in the market price of your bond. In case interest rate go up, the market price of the bond will go down and if you sell your bonds at this time, you may end up with less than you invested.

Liquidity Risk

In case you wish to sell your bonds before maturity date, you may face the risk of not finding the buyer easily for your bonds. Hence you may not get the price you expected to receive.

Why you should invest?

If you are looking for an investment that generates fixed income periodically, corporate bondsmay be an ideal investmentfor you. It normally offers you a higher rate of interest as compared to fixed deposits or postal savings or similar investments.

Read more about: corporate bond, interest rates
Story first published: Saturday, May 11, 2013, 11:40 [IST]
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