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5. WHAT ARE THE RISKS OF INVESTING IN FIXED INTEREST SECURITIES?
When you invest in fixed interest securities, you take the risk of having
the market value of your investment decrease. It is also possible that the
issuer of the security may not be able to keep up interest payments
or repay the capital sum.
Fixed interest security prices are determined by:
- interest rates
- the creditworthiness
of the issuer
If interest rates increase, the price of the security will
decrease. This is because investors will be reluctant to purchase your bond
that pays 5% if the prevailing interest rate is 6% - they can get a
better rate elsewhere.
For most government bonds, there is considered to be virtually no risk of the
issuer failing to pay interest, or return your capital. However, with
corporate bonds, there is a chance that adverse conditions in the company
could mean that your interest payments and return of capital are uncertain.
To compensate for this, investments in fixed interest securtities issued
by companies with a low credit quality tend to have higher yields.
However, in the event of the collapse of the company, creditors (fixed
interest security holders) rank higher than shareholders to receive a
return on their investment.
OTHER TOPICS:
1. What are fixed interest securities?
2. What types are available?
3. Why invest in fixed interest securities?
4. Australians are underweight in fixed interest securities
5. What are the risks of fixed interest securities?
6. How to invest in fixed interest securities
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About Fixed Interest
