Interest Rate Risk Bonds and other fixed-income investments tend to be sensitive to changes in interest rates. When interest rates rise, the value of these investments falls, and vice versa. After all, why would someone pay full price for a bond at 2% when new bonds are being issued at 4%? All investments are subject to market fluctuation, risk, and loss of principal. Investments, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Credit Risk Bond yields are closely tied to their perceived credit risk, which is the possibility that a borrower will default (fail to make payments) on any type of debt. Defaults can result in losses of principal and interest, disruption of cash flow, and collection costs. Inflation Risk Inflation is the increase in the prices of goods and services over time. This poses a threat because it could reduce the future purchasing power of your assets. When you evaluate the return on an investment, you may want to consider the “real” rate of return, which is adjusted for inflation.