Generally, stocks and bonds have an inverse relationship. That is, when stock prices rise, bond prices tend to fall, and vice-versa. The process of raising capital through the sale of debt is called leverage financing. Companies that sell debt instruments do so with the belief that, by investing the borrowed funds in the company, they will achieve a greater return on investment than the cost of borrowing those same funds from a lending institution or individual. It is important to know the inherent risks associated with bonds.
Major risks associated with bonds include credit risk, inflation risk and interest rate risk.
Interest rate risk concerns the relationship between bond prices and interest rates. When interest rates rise, bond prices fall. By the same mechanism, when interest rates decline, newly issued bonds become more expensive, resulting in lower yields. Typically, the longer the maturity of a bond, the more its price fluctuates when interest rates change. This occurs because longer-maturity bonds involve greater uncertainty.