RISK OF BONDS

• Political risk – As long as we are focusing on sovereign bonds, governments have to be taken into account.  Depending on the government, they are going to run different policies and that can make bond prices vary. Also, governments have the power of changing the economic stability of the country. 

• Economical risk – The economical risk can be reflected also in the political risk. When the economy is more stable, then the bonds are going to have less risk premium and less return. That happens viceversa, when more risk premium means that the government is not economically stable and there is a possibility of bankruptcy. 

When we are talking about countries that are the best to invest in, we are referring to countries that have very small possibilities to end up in bankruptcy.

Other types of risk (more experienced level): inflation risk, interest rate risk, re-invenstment risk, credit risk, market risk and liquidity risk.