Most common risks encountered with bond investing:
Defaults: when the corporation or government agency that issued the
bond defaults on interest payments. When this happens, not only do you lose
out on income, but also the price of the bond usually plummets.
Rising interest rates: if you buy a bond at its face value and then
rates rise, you won’t lose any money as long as you hold the bond to
maturity. However, if you sell before maturity, you may not get the same purchase
price that you paid for it.
Early calls: some bonds may be “called” back before the
maturity date, which essentially means you’ll get paid the face value
earlier. However, you’ll lose out on interest income that would have
been paid out to you up until the original maturity date. Worse yet, some
investors will pay a premium price (more than the bond’s face value)
in exchange for a higher interest rate, in which case the investor may lose
both the interest and the difference paid out for the premium versus the face
value of the bond.