Why Are Bonds Less Risky to Buy

Everyone has heard that bonds are less risky to buy than stocks. But, not everyone is clear on why bonds are less risky to buy than many other types of investments. Or, if bonds are really less risky to buy or is it just a false preconception or a myth.

Are bonds less risky to buy?

The answer is that it depends on what bonds you buy. There are bonds that are less risky or even safe to buy and there are bonds that are risky, even riskier than buying mutual funds or stocks.

Corporate bonds, for example, come in the types that are less risky to buy as well as the types that are risky to buy. Junk bonds, for example, are risky and if you want safety as your investment goal, you should not be buying junk bonds. So, not all bonds are less risky to buy.

For the bonds that are less risky to buy, why are they less risky?

Bonds are usually less risky to buy because they are fixed income investments. Unlike stocks and mutual funds, when you invest in a bond, you are basically lending the bond issuer some money and the issuer promises to repay the bond at a certain time in the future (maturity date) as well as usually promise to give you a monthly payment of interest or quarterly depending on the terms of the bonds.

So, in return for investing your money into the bond, you are promised that:

1. you will get the par value back ($1,000 per bond)
2. you will get regular interest payments

In contrast, when you buy a stock or mutual fund, no one promises that you will get any money back. If the market is good then you will get the money back plus more but if the market is bad then you are likely to never see that money again.

However, the guarantee that comes with the bond is only as good as the credibility of the issuer because if the issuer files for bankruptcy then you may not see your money back either. That's why not all bonds are less risky but the ones that the issuer has strong financial stability are less risky. This is the reason why you need to look at the bond's rating before you buy it to make sure that the guarantee is good.