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Bond risks

Bond risks

Investing in bonds: important to know!

 

Investing and trading in itself is quite a risky occupation. Profitability is not guaranteed, you should rely only on your own strength and knowledge. As for bonds, traders usually do not make transactions with such an instrument due to its low volatility. Bonds are usually rarely subject to serious fluctuations in exchange value. Volatility is the lot of stocks. Often, bonds are used as a certain protection of their investment portfolio from corrections in the stock market and strong drawdowns. Bonds, as a financial asset, are good because they give a relatively high yield, compared to bank deposits, but, on the other hand, bonds cannot grow in price as much as individual stocks.

 

Bond risks

 

The most important and most dangerous bond risk is the default of the issuing company. Default is the inability of a company to pay off its debt obligations. A bond is a debt obligation of an issuing company. In plain language, we can say that if you buy bonds of the russian railways company, then our railway giant will become your debtor, and will have to pay you quarterly or semi-annually coupons on bonds, and at the end of the maturity of the bonds will have to repay them at par value. A recent negative example of a possible default on bonds was almost the state-owned company Rusnano, trading on which was forcibly suspended by the Moscow Exchange. There was a real risk of the company's default and non-payment of coupons to bondholders. The repayment of the bonds themselves at face value was also in question.

 

How to minimize risks when investing in bonds.

 

First of all, you should always carefully approach the choice of investment instruments for trading or long-term investment. Only a detailed study of the financial condition of the company and the adoption of an informed investment decision can protect against financial losses. In the case of bonds, it is important to pay attention to the credit rating assigned to a company by a reputable rating agency. But relying only on the rating is not worth it, as practice has shown. After all, Rusnano had the highest reliability rating, but nevertheless the company was on the verge of a technical default. Fortunately for the bondholders of this company, there was no default, the state financially supported Rusnano.

17.12.2021
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