Final answer:
Bonds carry risks such as interest rate and default risks, despite making predetermined payments. Diversifying an investment portfolio is essential to mitigate these risks. High risk levels historically lead to financial losses and destabilize portfolios.
Step-by-step explanation:
Despite the perception that bonds are safe investments due to their predetermined payments at a fixed rate of interest, they carry certain risks. One reason why bonds are somewhat risky to buy is that they are subject to interest rate risk. When interest rates rise, the value of existing bonds typically falls, because new bonds are likely to be issued with higher rates, making the older ones less attractive. Another risk is default risk, which refers to the possibility that a bond issuer might be unable to make the promised payments, leading to potential bankruptcy proceedings.
investment portfolio diversification is one strategy to mitigate the risks associated with bond investing. By purchasing bonds from a variety of issuers, investors can protect themselves against the failure of any single issuer. However, bonds should not be considered entirely risk-free, and it is important to assess the risk level and how it could be detrimental to one's overall investment strategy.
High risk levels have proven to be detrimental to an investment portfolio throughout history, as they can lead to significant financial losses and reduce portfolio stability. However, with thoughtful diversification and risk management, investors can seek to balance potential rewards with their tolerance for risk.