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Finance allah shmoop What are the major risks in owning

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bonds Okay so first thing about risk Like if you're

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one of those people who worries about asteroids dinosaur inhumanity

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Well then really the best place for your savings is

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probably in a certain aura casper Or you know whatever

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mattress brand you like Yeah go stuff those twenties into

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their sleep on them And well we guess you pray

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a lot Well if you have a bit more tolerance

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for risk than buns air calling for you Historically most

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funds are safe They boringly go along and pay their

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interest and principal and investors get their five point two

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eight nine seven percent returns or whatever the number is

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And that's it No heroes no goats just interest payments

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and peace So the bottom quartile of bonds i e

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V e riskiest quarter of them is still way safer

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than almost any equity or stock So the risks in

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bond ownership kind of come from a different place not

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necessarily from bankruptcy and the bonds not paying And yes

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there exists a risk numeral you know in the company

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or municipality or state going bankrupt Hello illinois California We're

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looking at you and not paying the interest they oh

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but that's an obvious risk and really rare in the

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scheme of things Like in all the bonds issued its

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some number in the very low zero point something percentages

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of bonds that actually don't finally pay And this number

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varies highly by era that is in the mortgage crisis

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of a wave no Nine while there was a huge

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spike in the number of bond delinquencies But in normal

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eras where the world isn't in fact teetering on the

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edge of bankruptcy a bond default is really rare So

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the risk in bond ownerships more about the opportunity cost

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of not owning stocks huh How's that go Well historically

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the stock market is compounded it seven eight nine ten

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percent a year and it doubles in value every seven

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eight nine ten years Something like that Bonds with consummately

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way less risk not surprisingly offer away less reward and

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frankly poor tax structure because bond interest is tax at

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ordinary income and stock appreciation is intact until you sell

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it And even then it's tax at long term gain

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rates usually so bonds compounded about half the rate of

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the stock market or stocks or less obviously depending on

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how much risk those bonds carrie right relative to where

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we are in the market cycle and so on But

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if you're feeling frisky and you buy junk bonds or

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high risk or high yield bonds well there are other

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risks beyond bankruptcy or looking over your shoulder and watching

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the stock market boom While you're getting only eight percent

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in year interest pre tax on your bonds right That

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risk calls that is bond's yielding a whopping eight percent

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have the risk that they get called early and refinanced

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for only five percent The transaction makes a ton of

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sense for the company who issued those high priced bonds

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It stays a mil three percent a year on big

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dollar amounts and that could be huge like taking a

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four hundred million dollars of debt And instead of paying

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eight percent on that well you're only paying five percent

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or something like that right But the risk then extends

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to the investor who thought they were buying a nice

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set of cash flows at eight percent on i'll say

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the hundred grand they invested or they'd get eight grand

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a year in interest on that investment bonds only to

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wake up one day with their hundred grand re funded

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maybe with a grand or two in premium or tip

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to say thank you for the short ride pal with

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the company then offering the same risk bonds for just

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five grand a year in bond rent money instead of 00:03:26.21 --> [endTime] eight So yeah

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