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Yield / Risk

Apart from general risks that need to be considered with any investment, there are some risks specific to bond investments.

Risk factor Impact
Default/credit risk The default or credit risk describes the possibility that the issuer may default on or be unable to repay its debt. The lower the issuer's credit rating, the higher the default risk and the higher the yield expected by investors as compensation. Changes to the borrower's credit rating have an impact on the price and hence on the yield of a bond.

Because bonds represent debt capital, in the event of bankruptcy creditors have a better chance of (at least partial) repayment of their invested capital than shareholders do. The credit rating of a company is determined by rating agencies and gives investors a basis for assessing the risk associated with it. For more information, see Bond valuing/rating.
Interest-rate risk The interest-rate risk, also called "interest risk" or "price risk", describes the effects of rising and falling market rates on bond prices. This type of risk has nothing to do with the issuer's credit rating; instead, it depends on the general economy, which is why it is also called "market risk". Rate changes affect bond owners in the following ways:

Rising market rates
The price of a bond drops as the market rate rises. However, interest payments can be reinvested at the increased market rates. To some extent, these two effects cancel each other out.

Falling market rates
The price of a bond rises as the market rate drops. However, interest payments can only be reinvested at the reduced market rates. Again, to some extent, the two effects cancel each other out.

The interest-rate risk can be calculated by means of duration analysis. This examines the change in a bond's price in the event of a one basis point (0.01%) change in the interest rate.
Repayment risk The terms and conditions of the issue may provide for the right to call a bond prematurely or repay it after a draw. There is a risk that the issuer will exercise its right of premature repayment. This usually occurs in cases where the issuer can refinance under more favourable conditions due to prevailing market conditions. This may entail a less profitable investment of the investor's liquidity.