Ric Edelman: Hi! I am Ric Edelman, ranked the number one independent Financial Advisor in the nation by Barron's.

Today, we are talking about risks that can affect your bonds. Today's topic, credit risk.

Almost all bonds have a credit rating. This rating estimates the safety of the bonds. Will you get the interest you are promised? Will you get your money back at maturity?

The credit rating helps you know how safe your bond is. Naturally, investors are willing to pay more for bonds with high ratings and less for bonds with low ratings.

But bond ratings can change, say if a company or state government gets into financial trouble. If that happens, the bonds they've already issued, the bonds you've already bought, could get downgraded. And if they get downgraded you could lose 10%, 20% even 30% or more from your bonds value. And if interest rates rise 3% on a 7-year duration bond, while this is happening your total losses could be 30%, 40% even 50%.

And you bought bonds because you thought they were safe. Well that's not exactly the safety you were looking for, is it?

Stay tuned for my next video, where I will show you how to reduce your exposure to both credit risk and interest rate risk.