When considering the risks associated with bonds, it’s generally accepted that a) default risk is the most significant. Default risk refers to the possibility that the issuer of the bond will fail to make the required interest payments or fail to repay the principal at maturity. This risk is particularly crucial for bond investors because if a bond issuer defaults, the investor may lose a significant portion of their investment.
While b) interest rate risk is also important—since bond prices are inversely related to interest rate changes—it doesn’t directly affect the bond’s ability to make payments. c) reinvestment rate risk poses a concern when interest rates fluctuate, but it mainly impacts cash flows that have already been generated rather than the bond itself. Lastly, d) maturity risk is more related to the time horizon and can influence the impact of other risks, but it isn’t as prominently significant as default risk. Therefore, when weighing the risks, default risk stands out as the primary concern for bondholders.