Most people invest in a bond because they are seeking to earn income or to preserve capital. Though there is nothing wrong with this, all too often people fail to realize or understand that there are certain risks inherent in investing in such debt instruments. So, before jumping in and investing your money on such instruments, pause to find out just how you might do something that will cost you dearly.

An important factor related to the bond is that you need to realize that there is an inverse relationship between the interest rates and the instruments price. As the interest rates rise there will be a corresponding fall in the price of the instrument and vice versa. This in turn means that until the instrument is redeemed (matures) you will notice that its price will fluctuate in tune with the existing interest rates.

There is also no way that an investor can protect themselves against such volatility. So, if you are going to invest to obtain fixed income you must be prepared to hold on to your instrument till it matures. Selling the instrument before the maturity date can cause losses if the interest rates are negative.

For those who are forced into filing for bankruptcy there is the problem that the people that have invested in the bond will have first claim to the instrument. So, rather your having the right to get the proceeds it is the investor that has first choice. Also, these instruments are not all created equal. There are some instruments that are known as senior notes that are usually backed by collateral and these instruments get first preference when staking a claim.

On the other hand, in the case of subordinated debentures; these will rank before stock but will not rank as high (for the purpose of making claims) the senior notes. Therefore, you must be sure about which kind of bond you are holding. This can be ascertained by looking at the certificate that will state whether it is a senior note. Even the broker that sold the note to you can help you know what your status is.

Also, be careful to understand that being the owner of the instrument does not in any way guarantee that it will help you earn money. So, do not take anything for granted.

Finally, be sure to understand the effects of fluctuations in the price of the bond. And, also make sure that you are buying it from a reputable company that will be able to pay you when it is time to redeem the instrument.

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