The Risk Of Default On Bonds

A bond is a financial contract, a debt instrument issued to investors by governments, financial institutions, industrial and commercial enterprises, etc. to raise funds by borrowing directly from society, while promising to pay interest at a certain rate and repay the principal on agreed terms. The risk of default is the risk that the borrower who issues the bond will not be able to pay the interest or repay the principal of the bond on time, thus causing losses to the bond investor. In this article, we will briefly introduce the default risk of bond investment.

I.What are the main risks of bonds

1,Default risk: The risk that the borrower who issues the bond cannot pay the interest or repay the principal of the bond on time, and brings losses to the bond investors.

2,Liquidity risk: The risk that the investor cannot sell the bond at a reasonable price within a short period of time, i.e., the situation that the investor cannot buy or sell the bond if he wants to. Currently, some bonds are not actively traded on the exchange, with a very low turnover (tens of thousands of transactions or even none, commonly known as "zombie bonds"). Of course, if you are prepared to hold to maturity, you do not need to consider liquidity risk.

3,Price fluctuation risk: The price of bonds fluctuates in real time due to factors such as supply and demand. However, for an investor who is prepared to hold to maturity, price fluctuations are irrelevant as his future interest income and principal repayment are certain, provided the bond does not default.
Among the biggest risks of a bond is the risk of default.


II. Why the greatest risk of a bond is the risk of default
1, To date, the credit risk of bonds on the stock exchange is virtually zero, and there have been no cases of non-payment.

2, The State has a strict approval process for the issuance of corporate bonds. The issuers of corporate bonds are various types of enterprises with different capital strength and operating conditions, and investors have to bear the risk of not being able to repay the capital and interest in time or according to the stipulated conditions due to losses or bankruptcy of the enterprises. However, the risk of corporate bonds is strictly controlled at the national central level. The central government has a very strict approval process for the issuance of corporate bonds, with the National Development and Reform Commission, the Securities Regulatory Commission and the People's Bank of China overseeing different aspects of corporate bond issuance respectively. Generally speaking, it is the larger companies or enterprises with higher scale and credit rating that are allowed to issue after examination and approval by the relevant authorities.

3, Bonds are a social and public means of financing, and if a default occurs, it will be very detrimental to the long-term development of the bond market, and may even have a huge damaging effect on the entire financial credit system, with a very negative social impact. The corporate bond market is currently in the early stages of rapid development recently said: significantly increase the proportion of corporate bond financing in direct financing, and study, explore and launch new varieties of bonds such as high-yield corporate bonds, municipal bonds and agency bonds on a pilot basis. Against this backdrop, any default would be an unbearable blow, so the government and regulators will do their best to avoid, control and defuse the risks in the bond market. This explains why the "black swan" events in the bond market, such as the "municipal bonds" fiasco, have always come to pass without a hitch.

Nevertheless, it is important for investors to be aware of the risks involved when buying bonds, because just because there has been no credit risk in the past decade does not mean that there will not be credit risk in the next decade, and this risk is gradually increasing.

III. Cautions for bond investment
When choosing a bond, it is important to take into account the risk of default, credit rating, whether it is secured, whether it is a listed company, and what its financial position is.