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.

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