Common types of risk with Currency risk investment This is a risk associated with investing overseas or in continued international companies. As a UK-based investor, if you invest overseas, you’ll need to convert your money back into sterling when you want it back. As currency exchange rates change, Credit risk so will the value of your investment. This is a risk associated with bonds. If sterling strengthens against the currency of the If a company or government that has issued bonds country in which you’ve invested, this will lower the (also known as the issuer) fails to make interest payments value of your foreign investment. If sterling weakens, or repay the initial loan amount, a ‘default’ occurs. your foreign investment will increase in value. Each issuer has a credit rating that indicates its ability Inflation risk to pay back its loans. If an issuer’s credit rating is Inflation risk can affect all types of assets. downgraded (by a credit rating agency) it suggests that The higher the rate of inflation, the lower the actual the risk of it defaulting has increased, and the value of value of future returns. This is because as the rate of bonds issued by the company or government could fall. inflation increases, money devalues in real terms. For If this happens, an issuer might choose to offer higher example, you can’t buy as much with £5 today as you interest payments to entice investors who are taking could 30 years ago. a greater risk by lending money to that company or government. As you’ll remember from the graph on page 8, inflation Governments with solid public finances typically have causes a purely cash investment to devalue over time. a lower probability of default on their debt. Therefore, So ideally, any investment you make must beat the rate they are more likely to pay a lower level of interest. of inflation to grow your money in real terms. Companies tend to offer larger interest payments on their bonds to compensate for the higher risk that they could default. 10