What are the risks from fixed interest investment?
As with any investment, there are a number of risks you should consider. Some of the risks include:
- Credit risk: The potential for a partial or total loss of capital and interest due to a default by the borrower.
- Liquidity risk: The potential for loss though the inability to easily trade a security in order to convert that security to cash, should the funds be required before the debt matures.
- Interest rate risk: The potential for loss on the capital value of a security due to an upward movement in interest rates. Rising interest rates cause the price or present value of a debt security to fall. This will generate a capital loss for the investor, if the security is sold before maturity.
- Reinvestment risk: Fixed interest securities are valued on the assumption that all future cash flows are reinvested at the original investment interest rate or yield. Falling interest rates would see future cash flows reinvested at a lower rate, which would generate a lower return from the security.
While these are some of the risks of investing in fixed interest, this answer does not constitute advice. You must assess your own risk before choosing to invest.
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