What can an investor do to reduce the risks?
2007-01-16 14:25:52 · 4 answers · asked by foofergutierrez 1 in Business & Finance ➔ Investing
In my opinion bonds are actually more risky than a well balanced portfolio of stocks. Bond investors suffer from two primary risks. 1. the risk that interest rates will rise. Bond investors who bought bonds in the mid 70s saw the value of their bonds drop to 1/3 what they paid for them as inflation ran ramped. 2. the risk the the issurer will default on the bonds or that the bond rating might be down graded. Either will cause the investor to loose money, perhaps the whole amount of the investment as the investors in Washington Public Power bonds found out on their AAA rated bonds.
There is another problem with investing in taxable bonds as opposed to investing in equities. Bond interest is taxed at the full amount. Equity dividends and captial gains are taxed at very favorable rates and so long as you do not sell your sound equity investments there is no tax due at all.
2007-01-16 14:42:58 · answer #1 · answered by Anonymous · 1⤊ 1⤋
You'll have market risk, when the market goes south, and you're sitting there with the bonds as they devalue.
Bonds are opposite to the interest rates. When the rates go up, the bond prices go down.
Where could the same money do better over the same time period?
Municipal bonds are good to hold, because their growth is tax free.
Buy some bonds, and put them away. Then, buy a mutual fund, and salt some more money away.
Then, buy some real estate. Live in it while it grows, and always keep the payments up.
Sorry if I got off track. This is what has worked very well for me.
2007-01-16 15:15:34 · answer #2 · answered by Lion J 3 · 0⤊ 0⤋
Risk of bonds depends on the priority of risk of each, like a loan has highest priority, debuntures are next, bonds comes next, zero coupons, convertibles etc;. So as per the order of priority the borrower will be forced to pay on default liquidating their assets or from cash balances. So the debt is usually secured against the assets of the borrower so risk in minimal. Nobody calculate the risk of bond default except by rating agencies like Moody or S&P who are quite reliable based on whose ratings one invests like a AAA, AAB, AB etc;. They even rate soverign debts so for the investor it is easy to invest based on one's risk preference.
2007-01-17 05:55:35 · answer #3 · answered by Mathew C 5 · 0⤊ 0⤋
Default.
Do not invest in Junk Bonds.
2007-01-16 20:08:54 · answer #4 · answered by Anonymous · 0⤊ 1⤋