Benefits and Risks of Investing in Debt (bonds)

benefits of debt investments also knows as bonds

• Income : produce a steady and predictable income, unlike dividends from stocks, which are never guaranteed and are not an obligation of the issuer.

• Safety : If a corporation fails, bonds are higher in priority than equity securities.

what is the safest investment for U.S. investors?

Treasury-backed securities (debt backed by the U.S. Treasury)

Risk of debt investments

• Default : The primary risk when owning any debt security is that the issuer will fail to pay interest or principal when due. A default is the worst outcome of owning a bond.

• Interest Rate Risk : price of debt securities fluctuates inversely (rates up=bond prices go down. rates down=bond prices up)

• Purchasing Power Risk (Inflation) = Any security that produces a fixed payment, like bonds and preferred stock, is subject to purchasing power risk. As the fixed payment stays the same while prices are rising, the amount of goods the payment will buy decreases.

bond volatility

interest rates increase = bond prices decrease
interest rates decrease = bons prices increases