What are the cons of bonds

Advantages and Risks of Bonds

Bonds as an exchange-traded investment

Bonds are fixed-income securities that, like time deposits, offer a fixed term and a secure interest rate. Depending on the design of the papers the interest paid annually, then at the end of the term the repayment of the nominal investment amount.

Because bonds are traded on the stock exchange a sale every trading day at the current price possible. In this way, investors can achieve greater flexibility compared to fixed-term deposits, because the funds are available at any time when they are urgently needed.

The benefits of bonds

Bonds are increasingly used as an alternative to time deposits or savings bonds. The reason is the often higher interest rate compared to investing in banks and savings banks, so that the money can be invested with high yield.

The advantage of bonds is a secure and constant interest rate over the term, which investors can count on as soon as they take out the paper. As an alternative to this secure interest rate, bonds with rising interest rates can also be found, but this rate ladder is also guaranteed by the issuers. At the end of the term, the bond will then be 100% repaid. This means that investors receive their nominal amount, minus any purchase costs, paid out again.

Although bonds can be subject to price fluctuations during their term, the fluctuation ranges are small compared to investments in equities. This reduces the risk of price changes for investors, although it should never be neglected.

The risks of bonds

In addition to the numerous advantages, bonds also offer risks that should be taken into account when making an investment decision. For one, are bonds not protected by the deposit insurance of the institutes, but the right to payment of interest and repayment of the deposit is directed at the issuer. This issuer risk must be carefully examined, because in the event of the publisher's insolvency it can lead to total loss come to the plant. In order to assess this risk, bond issuers are rated by rating agencies. If the ratings are positive (rating A), the risk of failure is very low.

Another risk of the bonds is the risk of price changes. During the term, the price of the bonds can move both up and down. Anyone who has to have access to the deposit at short notice therefore has to accept price losses. The repayment is only 100% secured at the end of the term.