What Are Commercial Bonds And What Risks Do They Have?

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

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• 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.
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• 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.
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• 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.

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• 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.
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• 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.

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• 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.
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• Market risk it is the possibility that a rise
  in interest rates causes a decrease in the value
  of the bond.

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• 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.
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• 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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