This risk is reduced by holding securities with shorter maturities, rather than holding only longer-term bonds. Nevertheless, market risk is a major influence on the returns of the F Fund because the average maturity of securities in the LBA bond index is approximately 8.4 years, as of December 31, 2000. The interest rate increases of 1994 and 1999, however, resulted in negative returns for the LBA index. Such prepayments generally have a negative effect on mortgage-backed securities, because cash from the prepayments must be reinvested in securities with lower yields. To compensate for prepayment risk, mortgage-backed securities generally have higher yields than securities of similar credit quality and maturity.
Similar considerations apply to callable corporate bonds.
Thus, there is the potential for higher earnings with the F Fund than with the G Fund, but there is also a greater risk of loss. There is no assurance that past rates of return of the F Fund will be replicated in the future. You must decide what investment mix is appropriate for your situation and the level of risk you are willing to tolerate. If you choose to invest in the F Fund, you must formally acknowledge that you understand and accept the risks involved. F Fund rates of return are presented in the following table.