All bonds carry a risk that interest and principal will not be paid timely or in full. The benchmark indices against which our portfolios are constructed have average credit ratings in the “AA” range (upper medium grade) range and we invest only in bonds rated “BBB” or better, or (if unrated) deemed to be of “A” quality or better.
The value of any bond is subject to variation driven by rising or falling interest rates. Bond values and interest rates move in opposite directions. In general, bonds with shorter maturities are less price volatility than longer bonds. “Duration” is a convenient measure of bond price volatility; the price of a bond rises/falls by a percentage nearly equivalent to the number of years of duration. Inflation risk reduces the purchasing power of bond principal and interest over the longer term.