JUST BECAUSE BONDS have a reputation as conservative investments it does not mean they're always safe. Any time you lend money, after all, you run the risk that you won't be paid back. Companies, cities and counties occasionally do go bankrupt or default on their debts. Bank of Tanzania (BOT) Treasury bonds have been quite steady and promising thusfar. In fact, the recent rates of growth have made some companies consider them as a valuable long-term investment based on Tanzania's fast-growing economy and political stability.

Paradoxically, another source of risk for certain bonds is that your loan may be paid back early. What you are probably thinking is that it is certainly better than not being paid back at all; however, it forces you to find another place to put your money. Therefore, if you have a choice, buy a bond without the call option.

What about inflation?
By far, the greatest danger for a bond investor is a rising inflation rate. Luckily Tanzania's inflation rate has steadily been decreasing in the past 10 years and there are good indications of strong economic growth. So why is inflation such a problem for bondholders? Think about it this way: Rising prices make your T-Shillings today worth less in the future than they're worth today. Since a bond can lock up your money for as long as 10 years, a rising rate of inflation can have a particularly corrosive effect.

All this explains is what you or I might consider good news, they often consider bad. If the threat is high, prices fall and yields -- or interest rates -- rise. This is often an excellent time to buy bonds. But if you own them already, you're stuck.

Yield vs. Risk
Inflation risk, prepayment risk and all other risks are all figured into the pricing of bonds. The more risk, the higher the yield. It's also true that investors demand higher yields for longer maturities. The reason for that is obvious -- given enough time, a once-healthy corporation can go bankrupt and suddenly lose the ability to pay its obligations. Inflation could run rampant, seriously eroding the purchasing power of that $1,000 you're supposed to get back in 10 years. These things are unlikely or you'd never invest in the first place. But the longer you tie your money up in a bond, the more at-risk it is statistically.