Bonds-CDs
Bonds & CDs

Risk Considerations

Risks and Other Investment Considerations
  • Interest Rate Risk. New issue retail corporate bonds are generally unsecured debt obligations of each respective issuer. In addition to issuer-specific risks, an investment in new issue corporate bonds carries interest rate risk if the bond is sold prior to maturity.

    Like all bonds, original issue bonds tend to rise in value when interest rates fall and decline in value when interest rates rise. Investors who sell their bonds prior to maturity will be exposed to interest rate risk.

    Typically, the longer maturities have a greater degree of price volatility. If the bonds are callable, the price volatility will be influenced by the maturity, the call date, and the prevailing level of interest rates.

    If the bonds are held until maturity, investors are likely to be affected by price fluctuations, because investors will receive the par, or face, value of the bonds at maturity (assuming a creditworthy issuer).

  • Credit Risk. The ability of a corporate issuer to make all interest and principal payments in full and on schedule is a critical concern for investors. Most corporate issuers are evaluated for credit quality by the major rating services, such as Standard & Poor's (S&P), Moody's Investors Service (Moody's), and Fitch.

    Investors can check the rating of a corporate issuer prior to making an investment by contacting a financial advisor or through various websites. This information also is typically found in the prospectus for particular bonds.

    Bonds rated BBB or higher by S&P, Baa or higher by Moody's, and BBB or higher by Fitch are widely considered "investment grade". Any credit ratings that are assigned to corporate bonds may not reflect the potential impact of all risks on the market value of these securities.

  • Call Risk. One of the most difficult risks for investors to understand is "call" risk. If a specific issue of retail corporate bonds is callable, the issuer retains the right to retire or redeem the bond before the scheduled maturity date. For the issuer, the main benefit of such a feature is that it permits the issuer to replace the outstanding bond with one that has a lower interest rate (or cost to the issuer).

    A call feature creates uncertainty as to whether an investment in callable corporate bonds will remain outstanding until its maturity date. Investors risk losing an investment paying a higher rate of interest when rates have declined and an issuer decides to call in their bonds. When callable bonds are called, investors may be faced with reinvesting in securities with lower yields. When a bond is callable, it tends to limit the appreciation in a bond's price that could be expected when interest rates decline. Given these potential disadvantages, callable corporate bonds usually carry higher yields than non-callable bonds.

Please consult your financial advisor prior to investing any money in these or other products. These products are offered through many but not all broker-dealers. This information does not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any sale of those securities, in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful. Certain products are offered by prospectus or offering circular only. Product suitability must be determined for each individual investor.