Bond Risks and Rewards

While bonds are often considered safer investments than stocks, there are a number of risks to keep in mind. The level of risk associated with an individual bond can vary greatly. U.S. Government bonds are typically considered the safest types of bonds. Corporate investment-grade bonds typically offer lower risk than non-investment-grade or "junk" bonds. But all corporations, and even municipalities, can potentially default on interest payments or even go bankrupt in extreme situations. In addition, all bonds are subject to interest-rate risk, the risk that rising interest rates will reduce the market value of existing bonds.

Time also plays a big role in how much risk you'll be willing to take and how much interest will be paid. In general, the longer you're asked to lend your money, the higher the risk that something might go wrong, and therefore the higher the interest rate you can expect to earn. There are three main time-based categories:

Short-term bonds (generally under 2 years)
Intermediate-term bonds (generally 2-10 years)
Long-term bonds (generally more than 10 years)

To help manage these risks, many financial professionals recommend holding a variety of bonds with different maturity dates. As with stocks or most types of securities, you generally want to avoid holding a large bond position with a single issuer.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.