Value of Bonds

The value of bonds also will vary due to changes in the default risk, or credit rating, of bond issuers. If the issuer of the bond is unable to make timely principal and interest payments, the issuer is said to be in default.

Bonds issued by the U.S. government and by most federally related institutions are considered free of default risk. For other issuers, the risk of default is gauged by credit ratings assigned by four nationally recognized rating companies:

Moody's Investor's Service
Standard and Poor's Corporation
Duff & Phelps Credit Rating Company
Fitch Investors Service

Bonds that these rating companies place in the highest categories are known as investment-grade bonds. Bonds that are not assigned an investment grade rating are called junk bonds. These bonds have a higher degree of credit risk but also offer a higher potential yield.

Funds that aim for current income may be speculative, investing in high-yield, high-risk securities such as junk bonds, or conservative in outlook, investing in low-risk securities with a good record of paying dividends. Between the extremes are funds that are willing to take some risk for higher returns but are mindful of the need to conserve capital.

In general, younger investors, with most of their earning power ahead of them, can tolerate more risk than investors who are close to retirement.