In­vest­ing in Bonds

With con­ven­tional in­vest­ment bonds, you lend com­pan­ies or gov­ern­ments money for a fixed period of time. In re­turn, you re­ceive reg­u­lar in­terest pay­ments dur­ing the term. The loan prin­cipal is re­paid in full at the end of the period.

With money mar­ket in­vest­ments, you in­vest cap­ital at a pre-​defined in­terest rate for a short time. There is a min­imum in­vest­ment amount. The higher the in­terest rate, the more at­tract­ive the in­vest­ment.

A fixed-​income se­cur­ity may trade below its ac­tual face value prior to ma­tur­ity. You could face a loss if the is­suer – i.e. the bor­rower – fails to meet its pay­ment ob­lig­a­tions.

In­terest rates can af­fect the value of a fixed-​income se­cur­ity, caus­ing it to de­cline. You bear this risk as a bond in­vestor.

As an in­vestor, you bear the credit risk as­so­ci­ated with the is­suer of a fixed-​income se­cur­ity. Credit risk refers to the danger that the debtor may fail to make its pay­ments.

A guar­antor prom­ises to pay all or part of the bond face value if the is­suer de­clares bank­ruptcy. As a bond in­vestor, you bear the risk that the guar­antor will fail to meet this ob­lig­a­tion.

You can only sell bonds prior to ma­tur­ity if you find a will­ing buyer. As a res­ult, you bear the risk that you may have to hold the bond to ma­tur­ity or sell it at a loss prior to ma­tur­ity.

Fluc­tu­at­ing ex­change rates can af­fect the value of a fixed-​income se­cur­ity de­nom­in­ated in a for­eign cur­rency. This risk falls to the in­vestor.

If you buy a lot of bonds from one is­suer, you could ex­per­i­ence large losses if the is­suer files for bank­ruptcy. You can avoid this risk through di­ver­si­fic­a­tion.

Re­pay­ment is not guar­an­teed if the debtor be­comes bank­rupt. Credit Suisse money mar­ket in­vest­ments in­clude a claim against the bank, though.