Morgan Stanley


The Cost of Waiting for Higher Rates

Risk Considerations

Interest Rate and Duration Risk

Interest rate risk is the risk that the market value of securities in a portfolio might rise or fall due to changes in prevailing interest rates. Generally, fixed income securities are sensitive to fluctuations in interest rates; all else being equal, if interest rates rise, bond prices will fall and vice versa. Duration measures a bond's price sensitivity to changes in interest rates. The longer the bond's duration, the more sensitive its market value is to changes in interest rates. Your Financial Advisor can provide you with the duration risk of your fixed income investments.

Credit Risk

Credit risk is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Widely recognized rating agencies, such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, offer their assessment of an issuer’s creditworthiness. US Treasury securities are considered to be among the ‘safest’ investments as they are backed by the ‘full faith and credit’ of the US government, while high yield (below investment grade) corporate bonds are considered to have the greatest credit risk.

Secondary Market and Liquidity Risk

You may be able to sell your bonds prior to maturity at prevailing market prices, although the degree of liquidity can vary between bond issues. The price you receive for fixed income securities sold in the secondary market may be more or less than the par value or the original purchase price.

Reinvestment Risk

Reinvestment risk is the risk that the income stream from a given investment (interest or principal) may be reinvested at a lower interest rate. This risk is especially evident during periods of falling interest rates where coupon payments are reinvested at a lower rate than the current instrument.


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Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Also, municipal bonds acquired in the secondary market at a discount may be subject to the market discount tax provisions, and therefore could give rise to taxable income. Typically, state tax-exemption applies if securities are issued within one’s state of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability.

Insurance does not pertain to market values, which will fluctuate over the life of the bonds; FAs/PWAs should inform clients that insurance covers only the timely payment of interest and principal when due. Credit ratings shown may be the higher of the 'underlying' rating of the issuer or the rating of any insurer providing credit enhancement to the bonds. It is important that you obtain the underlying credit rating of the issuer and consider it as a factor in any investment decision. Information on the underlying credit rating of the issuer can be obtained from your FA/PWA

A taxable equivalent yield is only one of many factors that should be considered when making an investment decision. Morgan Stanley and its Financial Advisors or Private Wealth Advisors do not offer tax advice; investors should consult their tax advisors before making any tax-related investment decisions. Build America Bonds described herein are backed by the credit quality of the issuer, and not the Federal Government. These Build America Bonds are structured as direct payment bonds, in which a direct Federal subsidy is paid to the state or local government issuer. You should read the relevant offering document. Zero coupon bonds may experience greater price volatility than interest bearing fixed income securities because of their comparatively longer duration. Municipal zero coupon bonds are generally tax-exempt; however, for taxpayers subject to the AMT, the accreted interest on some municipal bonds may be included in the AMT calculation. Municipal bonds are subject to rules regarding the treatment of any market discount if such bonds are purchased in the secondary market below the bond’s original issue or accreted price.

Non-Traditional Municipal Bonds are securities which are generally not backed by either a tax levied by a state or local unit of government or revenues generated by a public enterprise. Such securities could be investment grade, non-investment grade or unrated. These bonds do not carry a repayment obligation of the issuing (conduit) entity and upon the occurrence of certain events or circumstances may not return full principal at maturity. Non-traditional municipal bonds can be complex instruments and may include structured and/or securitized products. FAs and PWAs must explain to clients the structure of the particular investment, the source from which the issuer will make interest payments and principal repayments, the availability of funds to make such payments, and the conditions under which the bonds could result in a loss of principal. Non-traditional municipal bonds encompass diverse municipal issues, each with unique investment risks.

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