Which risk primarily affects bonds more directly than common stocks?

Interest rate risk primarily affects bonds more directly than common stocks because bonds have fixed interest payments that are sensitive to changes in market interest rates. When interest rates rise, the attraction of existing bonds with lower fixed rates diminishes, causing the market value of those bonds to decline. This relationship is due to the inverse correlation between market interest rates and bond prices.

In contrast, common stocks are generally less affected by interest rate changes because their performance is more closely tied to the company's earnings and overall market conditions rather than fixed income features. While rising interest rates may influence stock market performance, common stocks do not have the same fixed payment obligations that bonds do, making them less directly impacted by interest rate fluctuations.

Understanding the nature of interest rate risk helps illustrate why it is a critical concern for bond investors, as they must consider the potential for changes in rates that could impact the value of their bond holdings more significantly than changes affecting equity investments.