A. There are many risks in a bond fund, here are the major ones every bond investors should consider -
- Interest rate risk: if interest rates move higher, the value of your bonds or bond funds will fall.
- Currency risk: while foreign bonds funds could diversify your portfolio, if foreign currencies lose value when the dollar risks, your bonds dominated in foreign currencies could lose value.
- Default risk: if the bond issuer (US government, state or locality, or corporations) refuse or unable to pay principal and interest on time, your bond investment could lose value.
- Ratings risk: if an investment-grade corporate bond is downgraded to junk (rated BB or lower), your bond investment will lose value.
- Supply risk: if the government borrows far more heavily in the years ahead, long term investors will insist on higher yields which means lower prices.
- Yield-curve risk: this is a risk that money tied up long term but without higher yield to compensate when compared with investing in shorter term bonds.