The Pitfalls of Bond Investing
Most common risks encountered with bond investing:
- Defaults: when the corporation or government agency that issued the bond defaults on interest payments. When this happens, not only do you lose out on income, but also the price of the bond usually plummets.
- Rising interest rates: if you buy a bond at its face value and then rates rise, you won’t lose any money as long as you hold the bond to maturity. However, if you sell before maturity, you may not get the same purchase price that you paid for it.
- Early calls: some bonds may be “called” back before the maturity date, which essentially means you’ll get paid the face value earlier. However, you’ll lose out on interest income that would have been paid out to you up until the original maturity date. Worse yet, some investors will pay a premium price (more than the bond’s face value) in exchange for a higher interest rate, in which case the investor may lose both the interest and the difference paid out for the premium versus the face value of the bond.