Every investment involves at least some risk along with potential return. Achieving balance between them is important to the sustenance of an organization. A risk means the possibility of losing some or all of the invested money, and a return refers to the amount one expects to gain from the investment.

A risk or return depends on the type of investment, the issuing entity, the condition of the economy, and the flow of the securities markets. In general, higher returns require a greater risk. On the other hand, investments involving little risk have a lower return potential.

What is a Corporate Bond?

As the name suggests, a corporate bond is a debt security provided by a corporation, and is sold to investors. It is a type of bond used by a corporation to increase its funds for business expansion. In general, bonds are regarded as being less risky than stocks, and corporate bonds are deemed a higher risk than government bonds.

Risks Involved with All Types of Bonds

· Inflation risk. Inflation causes the value of tomorrow’s money to be worth less than the present value. It also results in greater interest rates, leading to reduced bond prices.

· Interest rate risk. Interest rates have a direct proportional relationship with bond prices. When interest rates soar, bond prices drop. The same is true the other way around.

· Market risk. This risk concerns the possibility that the whole bond market may plummet, downgrading the value of individual securities despite their specific qualities.

· Timing risk. This purports to the likelihood of an investment behaving poorly after its purchase or adequately after its sale.

· Selection risk. The risk that a security may perform inadequately in the market for unanticipated reasons.

Additional Risks for Corporate Bonds

· Call risk. “Call provision” is a part of some corporate bonds. This allows the providers to recover them at a specific price on a date before maturity. Falling interest rates may hasten the recovery of a callable bond, prompting a principal to be repaid earlier than expected.

· Legislative risk. This entails the chance that any modification in the tax code might disturb the value of the income that is taxable or exempted.

· Liquidity risk. This risk concerns the problem of finding a buyer, to whom a bond is sold, compelling the investor to sell

· Credit risk. The risk that a creditor will fail to pay the principal or interest in due time.