Credit risk

Credit risk is the risk of payment default of the coupon, and even the principal amount if the issuer has problems meeting its contractual obligations. This is also known as default risk or issuer risk.

Foreign exchange risk

Foreign exchange risk is the risk investors are exposed to when they trade in bonds that are denominated in a currency other than the functional currency of the investor caused by fluctuations in foreign exchange rates. This may erode the returns on the bond investment.

Liquidity risk

Liquidity risk is the risk of having a lack of buyers or sellers in the market, which may lead to the investor not being able to execute the trade or may be forced to trade at a value significantly away from the investor’s desired price. This can be deemed as liquidity risk.

Market risk

The value of the bond is subjected to interest rate changes, as well as demand and supply forces. Bonds, in particular, are sensitive to interest rate fluctuations and the prices of bonds move in opposite direction with interest rates. However, this risk is more pertinent if the investor decides not to hold the bond to maturity. Bonds may be packaged with guarantee security.