Final answer:
Bondholders cannot sell their bonds before they mature. Bonds are a form of debt instrument, where the investor lends money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity. While bonds are generally considered less risky than stocks, there is still some risk involved.
Step-by-step explanation:
Unlike stocks, bondholders cannot sell their bonds to other investors before they mature. This means that once a bond is purchased, the investor must hold onto it until it reaches its maturity date. This is because bonds are a form of debt instrument, where the investor is essentially lending money to the bond issuer in exchange for regular interest payments and the return of the principal amount at maturity.
For example, let's say you purchase a 10-year corporate bond with a face value of $1,000 and an annual coupon rate of 5%. This means that you will receive $50 in interest payments every year for the next 10 years. However, you cannot sell this bond to another investor before the 10 years are up. You are locked into holding the bond until it matures and the issuer repays you the $1,000 principal.
While bonds are generally considered less risky than stocks, there is still some risk involved. The main risk is that the bond issuer may default on its payments, meaning it fails to make the promised interest payments or repay the principal amount at maturity. In such cases, bondholders may experience financial loss. However, the risk is mitigated by the fact that bondholders have legal rights to take the issuer to court and require payment, even if it means selling off the issuer's assets.