Risks and Other Investment Considerations
- Interest Rate Risk - InterNotes may be secured or unsecured debt obligations of each respective issuer. In addition to issuer-specific risk, an investment in InterNotes carries 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.
- Credit Risk - 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. Most InterNotes are evaluated for credit quality by the major rating services, such as Standard & Poor's (S&P) and Moody's Investors Service (Moody's). Investors should note that time-lags may occur between when a rating agency adjusts a credit rating and when this information is disseminated.
Investors can check on the rating of an investment in InterNotes prior to buying by contacting your financial advisor, or visit the Rates section to view current programs, rates and ratings.
Bonds rated BBB or higher by S&P and Baa or higher by Moody's 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.
- Call Risk - 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.
- Program-Specific Risk - Please consult the applicable prospectus for potential risks specific to individual issuances of InterNotes.
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