The risks involved in bonds
No investment is 100% safe. And bonds are no exception.
These are the main risks involved.
Default
In case of bankrupt, the issuer of the bond won’t give you back your money.
Interest Rate Risk
This one is relevant only if you sell the bond before its maturity date on the secondary market. Interest rate is the % of what you will be paid for your loan. Let’s say your bond has an interest rate of 10% and a duration of 3 years. And you invested 1.000 ) plus 100 $ (the 10% of 1.000).
If it increases, your bond will be lesse interesting for a buyer.
So you will sell it only at a lower price than the original one, or not at allo.
Of course this can go also the other way around. Instead of a lower price, you can get a bigger one. The market will decide based on the current situation.
Inflation
This is the other big risk. Inflation happens when prices increase.
In such situation when the bond issuer pays back your loan, your money will be less worth.
Inflation is quite normal in a healthy economy. So, this risk increases with the length of the investment.
To compensate this generally bonds with longer term pay a higher interest rates.