Interest rate risk and default risk are the 2 biggest concerns when investing in bonds.
For the former, this is because bond prices and interest rate movements are inversely related. When interest rate rises, existing bonds lose value, because new bonds would give a better coupon rate.
When interest rate falls, existing bonds increase in value because their coupon rate is higher than any new bond that will be issued.
But if you're holding till maturity, you shouldn't care about the daily price movements of your bond.
For the latter, bonds are guaranteed by the issuer. Thus, the promise is only as good as the one giving it.
When bond issuers go bust, they may not have enough money to pay their bond holders and current bonds may collapse, leaving you with nothing.
The most recent case being Hyflux.
Thus, bond issuers are given credit ratings as an indication of how likely they will be able to follow through with their promise. But take this with a pinch of salt because even AAA rated (highest rated) bonds have defaulted.
Overall, bonds are much safer than equities and give you constant predictable passive income with capital protection.
Just make sure you choose your bond issuer well. Oh and a last note, the higher the coupon rate on the bond, the higher the risk. Bond investors expect to be rewarded by taking the risk of the bond defaulting with a higher coupon rate. So don't go buying a 10-12% coupon bond because wah so high return. Do your due diligence.
Interest rate risk and default risk are the 2 biggest concerns when investing in bonds.
For the former, this is because bond prices and interest rate movements are inversely related. When interest rate rises, existing bonds lose value, because new bonds would give a better coupon rate.
When interest rate falls, existing bonds increase in value because their coupon rate is higher than any new bond that will be issued.
But if you're holding till maturity, you shouldn't care about the daily price movements of your bond.
For the latter, bonds are guaranteed by the issuer. Thus, the promise is only as good as the one giving it.
When bond issuers go bust, they may not have enough money to pay their bond holders and current bonds may collapse, leaving you with nothing.
The most recent case being Hyflux.
Thus, bond issuers are given credit ratings as an indication of how likely they will be able to follow through with their promise. But take this with a pinch of salt because even AAA rated (highest rated) bonds have defaulted.
Overall, bonds are much safer than equities and give you constant predictable passive income with capital protection.
Just make sure you choose your bond issuer well. Oh and a last note, the higher the coupon rate on the bond, the higher the risk. Bond investors expect to be rewarded by taking the risk of the bond defaulting with a higher coupon rate. So don't go buying a 10-12% coupon bond because wah so high return. Do your due diligence.