Financial Security

A common misconception among some investors is that bonds and bond funds have little or no risk. Like any investment, bond funds are subject to a number of investment risks including:

1. “Credit risk” This is the risk that the issuers of the bonds owned by a fund may default (meaning fail to pay the debt that they owe on the bonds that they have issued). This risk may be minimal for funds that invest in insured or U.S. Government bonds.

2. “Prepayment risk” This is the risk that the issuers of the bonds owned by a fund will prepay them when interest rates have declined. Because interest rates have declined, the fund may have to reinvest the proceeds in bonds with lower interest rates, which can reduce the funds return. (Not all bonds can be prepaid.)

3. “Interest rate risk” The risk that the market value of the bonds owned by a fund will fluctuate as interest rates go up and down. Nearly all bond funds are subject to this type of risk, but funds holding bonds with longer maturities are more subject to this risk than funds holding bonds with shorter maturities. Because of this type of risk, you can lose money in a bond fund, including those that invest only in insured bonds or government bonds.

A bond funds prospectus should disclose these and any other risks. Make certain you invest your time in reading and understanding this prospectus.