The following risks are common to individual bonds and to mutual funds and ETFs containing bonds.
Interest rate risk
The risk that the value of a fixed income security will fall as a result of a change in interest rates. This risk can be reduced by diversifying the maturities of Individual fixed income securities, investing in mutual funds or ETFs that diversify maturities, or investing in floating rate securities.
The risk that a security will default or that its credit rating will be downgraded, resulting in a decrease in value for the security. The measurement of credit risk usually considers the risk of default, credit downgrade, or change in credit spread.
The risk to the security holder that the call option will be exercised by the issuer at an unfavorable time for the holder, such as when interest rates are low; if you are a bondholder whose security is called, you can lose potential interest income.
The relative ability of a security to be sold without substantial transaction costs or reduction in value. The harder it is to sell a security or the greater the loss in value resulting from a sale, the greater the liquidity risk.
The risk that a bond matures or is called when interest rates are lower, leaving the investor with lower yielding reinvestment options and possible reduction in cash flow. To mitigate reinvestment risk, an investor can purchase non-callable bonds, which are not subject to early redemption and/or ladder bond maturities at different intervals over time.
Inflation Risk (Purchasing Power Risk)
The risk that inflation will erode the real return on investment. This occurs when prices rise at a higher rate than investment returns and, as a result, money buys less in the future. The risk is greatest if you’re investing over long periods of time. Inflation-protected securities can be used to mitigate inflation risk.
Market and event risk
The risk that a change in the overall market environment or a specific occurrence such as a political incident will have a negative impact on the price/value of your investment.