Final answer:
Bonds carry default risk, especially with corporate issuers that may fail to make payments, leading to losses for bondholders. Interest rate and inflation risks can affect the value and purchasing power of bond payments. Diversification can mitigate, but not eliminate, these risks.
Step-by-step explanation:
Bonds are somewhat risky to buy, even with their promise of predetermined payments, because there are several inherent risks involved. One primary risk is default risk, which occurs when the bond issuer fails to make the scheduled interest payments or repay the principal at maturity.
This is more common with corporate bonds, especially from companies that face financial difficulties, and can lead to losses for the bondholders. Even though bondholders can push a company into bankruptcy to recoup some of their investment, there's no guarantee they will recover the full amount.
Another risk is interest rate risk. If interest rates rise, the value of existing bonds with lower interest rates typically falls, since newer issues pay more. Selling such bonds before maturity could result in a capital loss. Inflation risk is also a concern because it can erode the purchasing power of the bond's future payments.
To mitigate these risks, investors can diversify by purchasing bonds from different issuers. However, even with diversification strategies, the risks cannot be entirely eliminated, making bond investments somewhat risky despite their fixed rate of interest.