Page 208 - A Canuck's Guide to Financial Literacy 2020

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Government Bonds Risks

▪ Interest Rate Risk

When interest rates rise the price of bonds decline. Interest rates also affect
economic activity and borrowing costs.

▪ Default Risk

Investing in government bonds could expose you to default risk especially if the
government bonds are rated poorly by a credit agency. The government may default
and not return you your principal.

▪ Inflation Risk

Higher prices lower the purchasing power of your investments. If your investment
returns don’t exceed inflation you are losing purchasing power. The government
should try to monitor inflation through fiscal and monetary policies.

▪ Liquidity Risk

If you need to sell an investment you may not be able to find a buyer in a timely
manner. This surely would depend on the credit rating of the government itself.

▪ Regulatory / Political Risk

Governments have a large effect on social stability and the economic environment
for investment. It’s important the government has business friendly policies.