Question

Bonds are considered to offer a guaranteed return, as they must be honored by law, but which is still a potential risk that investors face?

Answer 1

The issuer could go bankrupt is the potential risk that investors face.

Further Explanation:

Bond:  

The bond is a long-term debt which the company promises to pay with interest to their bondholders.  

• The issuer raise capital according to their need and want, they mostly do invest the money. So, this is not a potential risk faced by investors.
• The bondholders get interest for the investment in the bonds of the company, only the stockholders get the dividend payment by the company or the issuer.
• This is the only situation where the bondholder may face risk when the company or the issuer goes bankrupt, the issuer may not be able to pay the interest to its bondholders. Therefore, this is a potential risk faced by investors.
• If the issuer may not make a profit then also the issuer has to pay the interest to its bondholders whether he makes profit or not. It cannot be regarded as potential risk to investors.

Learn More:

1. Stock and bonds  

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2. Stock price  

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3. Stock portfolio  

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Answer Details:

Grade: High school

Chapter: Stocks and bonds

Subject: Business studies

Keywords:

Bonds are considered to offer a guaranteed return, as they must be honored by law, but which is still a potential risk that investors face.

Answer 2

The potential risk that the investors may face when this is made use is that the issuer may not be able to make profit when the bonds are considered to offer as a guaranteed return because they are honored by law and with that, this will cause the value of the bond to be lowered when exposed in the market in which the return will also be lower when return to the investors.