Bonds are normally treated as low risk securities, though they are Essay

Bonds are normally treated as low risk securities, though they are rarely risk-free. Assess the risks associated with bonds. Discuss the implications of these r - Essay Example Bonds are one of the methods of raising capital by the issuer, apart from selling shares or taking a bank loan. Once issued, the bonds too can be traded in the open market like shares. Bonds, like other debts, can be structured in different ways. Bonds attract interest and the yield from the bond is the interest rate paid on the bond divided by the bond’s market price. Bonds are normally treated as low risk securities, specially the Government Bonds. Corporate bonds by blue-chip companies are also considered safe. Nevertheless, bonds are rarely risk free. There are various risks associated with bonds and can have far reaching impacts. The income from bond is usually fixed but interest rate fluctuations affect the capital value of investments. The yield and hence the market price always depends on the market environment. A bond investor would normally avoid investing in overvalued bonds where the risk of default far outweighs the extra yield. If a bond portfolio is well structured it would be diversified across a range of credits with no concentration in undue sectors or issuers. Even the highly rated bonds carry certain amount of risks. Bond may be called or redeemed before the maturity date. Poor management of the organization by the issuer may reduce or even destroy the value of the bond. If a company is doing very well and has surplus cash to pay the outstanding debts, they may call the bonds. They would result in lower rate of interest for the investor. The issuer may call back this bond and issue fresh bond with a lower rate of interest. Hence, if the bond has been called, there would be no interest paid on such bonds. Various economic risks affect the value of bonds. These include rate of interest and the inflation (Online, 2004). If a bond was issued before the interest rate increased, it will lose its vale if it is sold before the maturity date. This is because in such a situation its price is likely to be lower than par