Risk Considerations

Interest Rate Risk

Typically, Agency and Supranational debt securities preserve investors' principal if purchased at par and held to maturity. However, investors who sell these bonds prior to maturity will be exposed to interest rate risk. Like all bonds, agency debt securities tend to rise in value when interest rates fall and decline in value when interest rates rise. Typically, the longer maturities have a greater degree of price volatility. If the bonds are callable, the price volatility will be influenced by, among other things, the maturity, the call date, and the prevailing level of interest rates.

Call Risk

Issuers typically exercise call options in periods of declining rates, thereby creating reinvestment risk for the investor. On the other hand, if an investor expects a security to be called and it is not, the investor faces an effective maturity extension that may or may not be desirable.

Liquidity Risk

A liquid and active secondary market exists for most Agency amd Supranational debt obligations. Secondary market prices are provided by many dealers, and a number of electronic exchanges list Agency amd Supranational debt on their systems. However, many debt issues are customized, and this customization can make it difficult to find a buyer for certain Agency issues.

Caution on Tax and Accounting Issues

The interest income on Agency and Supranational debt securities is subject to federal income tax with exemption from state and local taxes varying by agency and state. Investors should consult their tax advisors when researching their particular situation. Incapital does not provide tax or legal advice.


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