Case 16 Case 16 Bonds, Bond Mutual Funds and Risk Credit or default risk is the possibility that an investor will not receive timely interest and principal payments because of default by the creditor. The federal government and corporations with AAA ratings pay the lowest interest rate while companies with C rating pay a higher rate because of the higher credit risk. Call risk is the likelihood that bonds will be retired or called before maturity. When interest rates are low, bonds are usually called. Thus, an investor must reinvest in bonds with lower coupon rates.
Call provisions are most common for intermediate and long-term municipal bonds.
Interest rate risk is the potential for bond prices or values to change because of changes in interest rates. Bond A bears an 8 percent, semiannual coupon and a 20-year maturity. However, the yield to maturity is 8 percent. Bond B has the same characteristics as Bond A except that it has a five-year maturity. You as an investor might like to know the impact on prices if interest rates changed.