There are four major risks associated with fixed income:
- Interest rate risk
When interest rates rise, bond prices fall, meaning the bonds you hold lose value. Interest rate movements are the major cause of price volatility in bond markets.
- Inflation risk
Inflation is another source of risk for bond investors. Bonds provide a fixed amount of income at regular intervals. But if the rate of inflation outpaces this fixed amount of income, the investor loses purchasing power.
- Credit risk
If you invest in corporate bonds, you take on credit risk in addition to interest rate risk. Credit risk (also known as business risk or financial risk) is the possibility that an issuer could default on its debt obligation. If this happens, the investor may not receive the full value of their principal investment.
- Liquidity risk
Liquidity risk is the chance that an investor might want to sell a fixed income asset, but they’re unable to find a buyer.
You could manage these risks by diversifying investments within your fixed income portfolio.
Risk: While the investment approach described herein seeks to control risk, risk cannot be eliminated.