InvestorQ : What are some of the major disadvantages of investing money in bonds?
Crowny Pinto made post

What are some of the major disadvantages of investing money in bonds?

3 years ago
Bonds are fixed-income debt instruments that corporations and governments issue to investors to raise capital. At maturity, the investor is repaid the principal amount invested. Most bonds pay investors an annual interest rate during the life of the bond, called a coupon rate. Bonds are often called good investments for older investors who need to rely on steady interest income.

The disadvantages of bonds include rates rise, call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, and inflation risk.

Credit risk means that issuers could default on their interest and principal repayment obligations if they run into cash-flow problems. 

Fixed-rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest.

A company’s bondholders may lose much or all their money if the company that issues them enters a fiscal crisis and goes bankrupt. There is no guarantee of how much money will remain to repay bondholders.

Some bonds are callable, meaning that even though the company has agreed to make payments plus interest toward the debt for a certain period of time, the company can choose to pay off the bond early. 

Bond prices can become volatile depending on the credit rating of the issuer, for instance, if credit rating agencies like Standard and Poor’s and Moody’s upgrade or downgrade the credit rating of the issuer. An unanticipated downgrade will cause the market price of the bond to fall.

Another notable risk is event risk. Companies might face unforeseen circumstances that could undermine their ability to generate cash flow. The interest payments or repayment of the principal associated with a bond depend on an issuer's ability to generate this cash flow.

Investment returns on bonds are fixed. While this offers higher safety for investors, it is also a disadvantage as you forgo the higher potential gains if you invested in equity.

Bonds are less liquid compared to stocks. Bonds with a very high face value will also be less liquid as the pool of potential buyers is smaller.