Economic conditions affect the value of bond investments. Interest rates and inflation are two major economic factors that directly affect the worth and future of a bond.
Interest rates
Changing
interest rates
represent a significant risk. If you own a bond that was issued before an interest rate increase, you may lose money if you sell the bond before
maturity,
since its price will probably be lower than par value. As interest rates fluctuate, the bonds you hold can become less attractive, as investors and traders seek other bonds that pay higher interest rates.
Further, when interest rates are low, many investors put their money into stocks to get a higher return. Lack of interest in bonds can depress bond prices.
Inflation
The other economic risk bondholders face is rising
inflation.
The risk of holding a bond to maturity is that rising inflation could erode the buying power of the interest payments as well as the value of the principal.
The longer you hold a fixed-income investment, the more likely it is that inflation will erode its value.
