Are Bonds Risky?
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Let's start with the reward. Interest is paid, usually twice a year, on the money you invested. And, at the end of the loan term (aka maturity) your initial investment is repaid in full.
Can I get out early?
Yup, you can sell the bond to another investor. You do this through your online investment account. There are some hurdles though because there has to be an investor willing to buy and you may not get the exact amount back that you paid in - you could receive more or less, depending on what the investor is willing to pay. The only way to guarantee the exact amount you invested is returned is to hold the bond until maturity.
Right. Now tell me the risks.
As with any loan, the risk is that the company or government can’t afford to pay you back. This would happen if either went bust. In such a situation bond holders are paid out before shareholders so it’s safer than buying shares. Even so, there are many financially sound companies issuing lower risk bonds.
What's the difference between a bond and a share?
When you buy a bond you're lending money to a company in return for interest. When you buy a share you own a portion of the company in return for a share of the company's profits, we have a guide for this.
How can I tell which bonds are risky?
Compare the interest rates of bonds with similar maturity dates and you’ll see the difference in risk between them. Companies or governments that are less stable pay higher interest as a way to attract investors to lend to them. Opposingly, ‘safer’ organisations pay less interest. So when you see an amazingly high interest payment keep in mind that there’s a reason for it.