"The Risks to Investors of Fixed Income Investments"
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All financial investments involve risk. There's no way to escape it. Stuffing cash into your mattress carries the risk that a burglar will find and steal it from you.
So the trick is to manage risk so that even if some part of your money is lost, you still have enough to carry on. The more money you have, the easier that is.
Risks of Fixed Income Investments:
1. Repayment risk -- the investment can't (or won't) pay you back.
2. Prepayment -- you're paid back too soon.
3. Reinvestment -- once your money is returned to you, you have no place to put it that pays a high yield. This logically follows after the prepayment risk.
4. Interest rate -- they can change over the course of your investment
5. Inflation/Loss of purchasing Power -- this is actually the worst risk faced by fixed income investors over the long term.
6. Reinvestment -- you're paid back but don't have any equally desirable opportunities available.
7. Liquidity -- you would have trouble selling the investment if you needed or wanted to.
8. Event risk -- something totally nonfinancial happens. For instance, if you own a Chicago municipal bond and terrorists spray plutonium over all of the city, you've got a big problem even if you live in Texas.
9. Sector risk -- when the economy goes down across the entire country, all local governments collect fewer tax revenues. When the price of gold is low, all gold mining companies are affected.
10. Regulatory risk -- this is especially important to utilities companies, which are highly affected by local regulatory agency decisions.
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