Bonds Always Make Money
While bonds are structured to make money for investors, there are two key instances where investors may lose money when investing in a bond. First, the fixed nature of coupon payments and principal repayment are only valid if the bond is held to maturity. Should an investor sell the bond in the secondary market prior to maturity, there is the possibility of realising a mark-to-market loss, particularly in the case where interest rates have risen in the interim, resulting in a rise in bond yields. As such, investors who want to “lock-in” returns may wish to consider holding a bond to maturity.
The second instance where investors may lose money when investing in bonds is in the event of a default, where the issuer is unable to make good on coupon payments or bond principal. Nevertheless, when companies go belly-up, bondholders usually receive some of the proceeds from the bankruptcy process (the recovery rate is the amount received expressed as a percentage of face value of the bond), given that bonds are ranked above equity in the capital structure hierarchy.
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