Credit Risk
The chance that interest or principal payments will not be made because the issuer defaults. For lower-credit-rated issuers, \"junk\" bonds, credit risk is higher, and so are yields to compensate for the increased risk. 3. Inflation Risk: Inflation reduces the value of money; thus, it diminishes the purchase power of the fixed interest received by the bond. If inflation moves higher than the coupon rate of the bond, then real return on the said bond decreases.