Credit Risk

A bond issuer's ability to pay its debts (make all interest and principal payments in full and on schedule) is a key concern for investors. Most corporate bonds are evaluated for credit quality by Standard & Poor's, Moody's Investors Service and Fitch Ratings.

Bonds rated BBB or higher by Standard & Poor's and Fitch Ratings, and Baa or higher by Moody's, are widely considered "investment grade". In general, this indicates that the quality of the bonds is high enough for a "prudent" investor to purchase them.

Bonds rated BB (S&P and Fitch) or Ba (Moody's) or below are speculative investments - often called high yield bonds. These lower rated bonds typically pay higher interest rates than investment grade bonds to compensate for the extra risk. While investors are exposed to substantial risks in individual lower rated bonds, high yield bond mutual funds are a way to spread the risk over many assets.

Another potential exposure in owning corporate bonds is "event risk". Corporations are subject to supply and demand factors for their products, business cycles, restructurings, and/or recapitalizations which can seriously impact the value of an issuer's outstanding bonds. Any sudden increase in a company's debt load or inability to tap the new issue bond markets can push bond values down - occasionally resulting in sharply lower valuations. All bonds are subject to this potential risk.