What is the primary risk associated with bond investing related to interest rates?

The primary risk associated with bond investing related to interest rates is interest rate risk. This risk arises from the inverse relationship between bond prices and interest rates. When interest rates rise, the prices of existing bonds typically fall, and vice versa. This occurs because as new bonds are issued at higher interest rates, the existing bonds that pay lower rates become less attractive to investors, thus leading to a decrease in their market value.

Interest rate risk is particularly significant for long-term bonds, as they have a longer duration for their cash flows to be affected by changes in interest rates. As a result, investors in long-term bonds face greater fluctuations in their bond prices due to interest rate movements than those investing in short-term bonds.

Understanding interest rate risk is essential for bond investors because it influences the potential returns on their investments and impacts portfolio management strategies. Managing this risk may involve using various techniques such as duration analysis or diversifying bond holdings across different maturities.