The risks of bearer bonds for investors
This is a risk that investors bear with bearer bonds Emittentenrisiko. This means that in the event of bankruptcy, investors could no longer see part or all of their capital. In the case of subordinated bearer bonds in particular, total loss in the event of insolvency is more likely to be the rule, since the claims of the bondholder are only considered after the non-subordinated creditors have been satisfied.
Our recommendation: When investing in bearer bonds, you should not neglect to research the issuer’s business and financial situation.
In addition to the issuer risk, bondholders are also exposed to the market price or Kursänderungsrisiko exposed. This can usually lead to a drop in the price of the bond if the general level of interest rates rises. Rating downgrades or rumors of issuer payment problems can also shoot up yields and cause the price of the bond to tumble. Investors who want to get their money when the price is falling and cannot or do not want to wait until the repayment date may have to expect price losses.
This can be a next risk for investors Liquiditätsrisiko being. On the one hand, this could result from the fact that it is difficult to find buyers for unlisted bonds if the bondholder wants to convert their bond into cash. On the other hand, there could also be problems with the sale of listed bonds. This would be possible if there were hardly any stock market turnovers when trading the bond. If there are no buyers in the market, it will not be easy to get your bond sold.
This still exists, especially with fixed-interest bonds with longer maturities Inflationsrisiko. If inflation rises sharply, the real return could suffer or even turn negative. If an investor had bought a ten-year bond for a nominal EUR 1,000 at 100 percent market value with a fixed interest rate of 2 percent and the long-term inflation rate was 4 percent, the real return would be negative at -2 percent. Furthermore, due to the increase in inflation, there would also be a tendency for market interest rates to rise, which would also mean that the price of the bond should tumble. A rise in inflation is therefore pure poison for any investor who holds bonds with longer maturities and fixed interest rates. The risk of inflation is less of a problem with floating-rate bonds because interest rates are adjusted regularly. When inflation rises, interest rates should usually tend to rise as well.
In the case of a bond issue in a foreign currency, the investor also bears that exchange rate risk. Thus, both the interest payments and the repayment amount at the end of the term can deviate significantly from the hoped-for amount in euros. For example, assuming a euro/US dollar exchange rate of 1 and investing €10,000 in US dollar one year fixed rate bonds at a bond price of 100% and paying 3% annual interest, the investor would trade at the maturity and Interest payment day with a devaluation of the US dollar and a new exchange rate of 1.20 US dollars for 1 euro after one year of investment only 8,333.33 euros nominal and 250 euros interest received. Not a good investment because of the dollar weakness. On the other hand, if the US dollar had been able to appreciate, an exchange rate gain would have been possible. When investing in debt securities in a foreign currency, the future development of the exchange rate is of enormous importance.
A final risk for investors explained here is the termination and resulting risk reinvestment risk If a debtor’s right to terminate the bond is agreed in the bond conditions and the issuer makes use of his right to early repayment of the nominal amount, the investor will receive his invested capital back before the end of the term. As a result, the investor may lose a return, since the issuer is more likely to terminate the contract when market interest rates have fallen and the issuer can raise capital at lower cost by issuing new bonds.
Attention: However, if the market interest level has fallen, the paid-out investor can only find lower-yielding investments on the market for reinvestment with the same risk as before.