Investment Grade Bond Fund Risk Factors

An investment grade bond fund carries certain risk factors that any investor needs to be aware of. No investment is without risk. The important points are to understand the investment, know the risks and be financially prepared for the inevitable ups and downs.

The Good News on Investment Grade Bonds

An investment grade bond fund will have among its objectives to invest in investment grade bonds. This means the bonds have been rated by the primary rating agencies, Standard & Poor’s and Moody’s, as at least BBB- or Baa3, respectively.

These bonds are rated high enough so that banks can invest in them. Below these ratings bonds are considered speculative and riskier.

Risk of Investment Grade Bonds

While investment grade bonds are rated more highly than junk bonds, they still have risks, and an investment grade bond fund will have the same risks, which include:

  • Interest Rate - The bond’s trading value will rise with falling interest rates and fall with rising rates.
  • Date To Maturity - The longer the date to the bond’s maturity, the greater chance that something might happen either in market conditions or with the bond’s issuer to lessen the value of the bond.
  • Default - A bond is debt issued by a bond issuer with the promise to repay the initial investment and, typically, to pay a monthly payment to the bond holder. If the bond issuer gets into financial trouble, the bonds can go into default and the bond holder lose both the initial investment and the monthly payments.

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