Bonds are generally seen as a safe investment option. While the potential payoff is not the same as other investment opportunities, the possibility of losing your money is rather low, although it does depend on the kind of bond you invest in. Due to this, it is important to know what the different kinds of bond risks are and what to watch out for.
Government bonds have the lowest amount of risk, but there is also the lowest possible payoff for the investment. Essentially, the only real risk you have with the government bonds is potential inflation. If you invest in a 10-year government bond and inflation increases at a greater percentage than your bond, you actually end up with less money than what you started with. While this generally does not happen, there is always the possibility.
Municipal bonds are basically the cousin to government bonds. Given out by cities and other local governments instead of the federal treasury, there is a slightly greater risk of something negative happening, although you likely are safe. Unless the city goes bankrupt, you are not going to run into any real problem, and these bonds generally come with a higher investment payoff than government bonds. As is the case with most investments, the greater the risk the greater the reward, and as municipal bonds have a slightly greater risk, there is a slightly greater reward.
Corporate bonds do come with inherent risk. During the time of your bond, it is possible that the business will go bankrupt. Should this happen, you are likely not going to receive your return on investment or any of the money at all that you invested. Even if you know a good deal about the company now, a lot can change over the course of 10 years or so. That is also why the possible return on investment is far higher than the other bond options.
Zero Coupon Bonds
Zero-coupon bonds are just as risky as corporate bonds. While the zero coupon bonds are issued differently than corporate bonds, you still are dealing with another business, and whenever you deal with a business, you increase your chance of running into bankruptcy. Should a company go out of business during the course of the zero-coupon bonds, you are most likely not going to receive any return on your investment.
As you can see, the main problem you might run into with different bonds is bankruptcy. Whether it is bankruptcy from a business or a local city government, bankruptcy is something that can cause you to lose part if not all of your investment. Government bonds are probably the safest form of investment around, although the value increase in your investment is not extremely high, so the return on your investment is low. However, these kinds of investments are nice to consider and can help diversify your portfolio. Just make sure you do your homework on any sort of business in invest with.