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What Are Commercial Bonds And What Risks Do They Have?

Commercial bonds are a fixed income instrument issued by a government or by an investment management company to finance itself. Visit here: https://bit.ly/3DS6XMg

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What Are Commercial Bonds And What Risks Do They Have?

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  1. What Are Commercial Bonds And What Risks Do They Have?

  2. Commercial bonds are a fixed income instrument issued by a government or by an investment management company to finance itself. These products are, in short, a debt. Its operation is simple: the issuer of the bond undertakes to repay the money lent to the bondholder on a previously agreed date together with interest, which can be paid regularly by means of a coupon or discounted from the initial capital. Bond issues allow public and private institutions to obtain large sums of money that they could hardly raise if they applied for a loan from a single lender. With this system, they can divide the loan amount they need into many parts (the bonds) so that anyone who wants it (institutional or retail investors) can invest.

  3. How do you invest in bonds? Bonds can be freely bought and sold on the secondary market through an investment management company, just like other financial assets such as shares, or they can be purchased in regular debt issuances by private corporations and states. We can also invest in bonds and other fixed income products indirectly by contracting investment funds or contributing money to pension plans that invest in these products. If we buy bonds in the secondary market, there is a possibility that we will buy them above or below their face value. Likewise, institutions can also launch debt issues with negative returns.

  4. Are commercial bonds risky? Conservative investors tend to prefer fixed income to equities as they are assets with a lower level of risk. After all, if we go to a bond issue and keep them until the maturity date, in theory, we will recover our money together with the agreed interest, unless the bond has been issued with a negative return. On the other hand, if we decide to invest in the stock market by buying shares, we will not know how much money we will earn until we close the operation. However, bonds and other fixed income assets also have their risks. For example, if we want to get rid of the asset before its maturity through the secondary market, we may have to sell it below its nominal value or, on the contrary, we can sell it at a premium and get more profit.

  5. These are the risks associated with bonds: • Credit risk: it is the danger that the issuer of the bond cannot meet its commitment to return the money to the bondholder. Corporate bonds have a higher credit risk than sovereign bonds. • Market risk: it is the possibility that a rise in interest rates causes a decrease in the value of the bond.

  6. • Exchange rate risk: this is the possibility that the exchange rate of a currency pair will affect the final yield of the bond if it is denominated in a currency other than ours. • Inflation risk: it is the risk that inflation rises above the coupon of the commercial bonds, which would imply a negative real return since the investment would not earn earnings equal to or greater than inflation.

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