InterNotesSM Corporate Bond Offerings: Risks
Interest Rate Risk
InterNotes are unsecured corporate bonds with interest rate risk—if sold prior to maturity.
Like all bonds, InterNotes tend to rise in value when interest rates fall, and they tend to fall in value when interest rates rise. If you sell InterNotes prior to maturity, you will be exposed to interest rate risk.
Typically, the longer maturities of InterNotes have greater a degree of price volatility. If the InterNotes are callable, the price volatility will be influenced by the maturity, the call date, and the prevailing level of interest rates.
By holding InterNotes until maturity, you are likely to be less concerned about these price fluctuations, because you will receive the par, or face, value of your InterNotes at maturity.
The ability of an issuer of InterNotes to pay its debt that is, make all interest and principal payments in full and on schedule is a critical concern for investors. All bonds have some level of credit risk. Most InterNotes are evaluated for credit quality by the major rating services, such as Standard & Poors (S&P) and Moodys Investors Service (Moodys).
Investors can check on the S&P or Moodys rating of an investment in InterNotes prior to buying by reviewing the current offerings section to view this weeks issuers, rates and ratings.
Bonds rated BBB or higher by S&P and Baa or higher by Moodys are widely considered investment grade. Any credit ratings that are assigned to InterNotes may not reflect the potential impact of all risks on the market value of these securities. For a more detailed explanation, please see the Rating Definitions page.
One of the most difficult risks for investors to understand is call risk. If a specific issue of InterNotes is callable, the issuer retains the right to retire—that is, redeem—the debt before the scheduled maturity date. For the issuer, the chief benefit of such a feature is that it permits the issuer to replace the outstanding debt with a lower-interest cost new issue.
A call feature creates uncertainty as to whether an investment in InterNotes will remain outstanding until its maturity date. Investors risk losing an investment paying a higher rate of interest when rates have declined and an issuer decides to call in their InterNotes.
When InterNotes are called, investors may be faced with reinvesting in securities with lower yields. Calls also tend to limit the appreciation in an InterNotes price that could be expected when interest rates decline. Given these potential disadvantages, callable InterNotes usually carry higher yields than non-callable InterNotes.