All investments carry risks. Bonds are no exception.
1.Credit Risk & Risk of Default by Issuer/ Guarantor
You assume the full credit risk of the issuer and the guarantor (where applicable). You are relying on the issuer and the guarantor to meet its/their payment obligations under the Bond. Should the issuer and/or the guarantor become insolvent or default on its/their obligations (including payment obligations) or fail in any other way, you may not receive any repayment of your principal amount or any other payments due to you under the terms of the Bond. A credit rating is not a recommendation or assurance as to the issuer’s and/or the guarantor’s (where applicable) creditworthiness or the risks, returns or suitability of the Bond.
2.Interest Rate Risk
The market value of the bond is exposed to the movement of interest rates during the tenor of the bond and whenever it is terminated or sold. As interest rates move upwards, the value of the bond will generally fall. Moreover, the longer the tenor of the bond, the more sensitive it will be to interest rate changes.
Where the bond is denominated in a non-local currency, including the Renminbi (the “RMB”), you face the risk of exchange rate fluctuations and controls (where applicable) that may (i) affect the applicable exchange rate and result in the receipt of reduced coupon(s), cash settlement amounts and/or a loss of principal when converted back into your local currency and (ii) make it impossible or impracticable for the issuer to pay you in the original settlement currency. Conversion between the RMB and other currencies, including the Hong Kong dollar, is subject to PRC regulatory restrictions. Exchange Controls imposed by the relevant authorities may also adversely affect the applicable exchange rate. You should be aware that the RMB is currently not a freely convertible currency and that conversion of the RMB through banks in Hong Kong is subject to certain restrictions such as a regulatorily- prescribed daily conversion limit.
There is no guarantee that a liquid secondary market will exist for the bonds. Some bond securities are illiquid and are not designed to be short-term trading instruments. For such bonds, you must be prepared to hold them until maturity or until the issuer chooses to repurchase them. This means that you may not be able to sell the bonds or terminate the investment at the expected time or price or at all.
The return on bond investments will lose purchasing power if commodity prices go up. Inflation is therefore a serious concern for those who need to rely on the regular income from bonds.