Question

BOND RISK

Bonds are often considered safer investments than stock. As a bondholder, what risks would you face, and how are these risk factors lower for bonds than they are for stock?  

Answer 1

Risks in bonds are comparatively lower than the risk of stock. Some of these risk are:

1. Credit risk: the bondholders will always have the credibility risk on part of the issuer. If the company is not financially stable, there is a risk . For bond holders there is a risk of non-payment of interest. But there is much higher risk for the equity holders because they not only have risk of dividend they have the risk of losing their capital too. The bond holders will always receive their principal amount. The same cannot be said for equity shareholder.
2. Market risk: the bond has the risk of declining in value if the market falls. Because of which price of the bond decreases and if we need to sell it before maturity, we might sell it at a loss. But here we have the security of selling it at the face value at maturity, which is not the case with equity. The price of the equity is never the same and thus there is chance of major fall in the price in the future thus leading to greater loss .
3. Interest rate risk: the bondholders have the risk of change in the interest rate, this leads to change in the price of the stock. But this will affect the holders only If they wish to sell the bond before maturity. but in case of equity holder, they would receive they do not receive a fixed rate of interest and they do not have predetermined return . they will receive return as per the working of the company and their profits and the market conditions. ..
4. Liquidity risk: there is always a possibility for bond holders to not be able to sell their bonds due to lower number of buyers and sellers involved. But the stock has much higher liquidly risk because unlike bonds which atleast offers a fixed interest with them, stock doesn’t which makes selling it easily quite not possible.