Program Fundamentals: Fidelity® Strategic Disciplines

grade; bonds with lower ratings are considered higher risk, speculative, or high yield. Lower-rated
bonds will often have higher yields to compensate investors for increased risk. You need to consider
your risk tolerance when evaluating potential bond investments. Municipal bond issuers may pay a
premium to an insurer, who will provide interest and principal payments on the bond in the event of
the failure of the issuer to do so. The credit rating of these insured bonds can be higher than that
of the issuer. In the case of insured municipal bonds, evaluating the rating of the insurer as well as
the issuer is recommended for a more complete assessment of the bonds’ credit risk profile. The
rating of the issuer is sometimes referred to as the underlying rating. Should something change
that causes a rating agency to change its rating for a particular bond or issuer, the market price
of the bond and the resultant yield on the municipal bond is likely to change as a result. Investors
are encouraged to learn more about the rating definitions and methodologies used by the various
rating services. These definitions and methodologies are available at www.standardandpoors.com
and www.moodys.com.
Interest Rate Changes. Bonds have varying levels of sensitivity to changes in interest rates. In
general, the price of a bond can fall when interest rates rise and can rise when interest rates fall.
Bonds with longer maturities can be more sensitive to interest rate changes. In other words, the
longer the maturity of a bond, the greater the impact a change in interest rates could have on the
bond’s price. In addition, short- and long-term interest rates do not necessarily move in the same
amount or the same direction. Short-term bonds tend to react to changes in short-term interest rates,
and long-term bonds tend to react to changes in long-term interest rates.
Taxes. Interest income generated by municipal bonds is generally expected to be exempt from
federal income taxes and, if the municipal bonds are held by an investor with legal residence in
the state of issuance, state and local income taxes. Such interest income may be subject to federal
and/or state alternative minimum taxes. Investing in municipal bonds for the purpose of generating
tax-exempt income may not be appropriate for investors in all tax brackets. Generally, tax-exempt
municipal bonds are not appropriate holdings for tax-advantaged accounts, such as IRAs and
401(k)s. Short- and long-term capital gains and gains characterized as market discount recognized
when municipal bonds are sold or mature are generally taxable at both the state and federal level.
Short- and long-term losses recognized when municipal bonds are sold or mature may generally
offset capital gains and/or small amounts of ordinary income at both the state and federal level. Tax
code changes could impact the municipal bond market. Tax laws are subject to change, and the
preferential tax treatment of municipal bond interest income may be removed or phased out for
investors at certain income levels.
Call Provisions. Bonds may have a call feature that allows or requires the issuer to redeem the
bonds at a specified price and date before maturity. Because a call provision offers protection to the
issuer, callable bonds usually offer a higher yield than comparable noncallable bonds, to compensate
the investor for the risk that the investor might have to reinvest the proceeds of a called bond at a
lower interest rate. Bonds are often called when interest rates have declined from the time the bond
was issued. For bonds with a call feature, investors should be aware of the yield to call as well as
the yield to maturity. For callable bonds, a call may result in a lower-than-expected yield or even a
loss. Investors may also face reinvestment risk, which is discussed later in this document. Investors
should also be aware of extraordinary redemption provisions. These provisions give a bond issuer
the right to call the bonds due to a one-time occurrence, as specified in the offering statement. The
circumstances could range from natural disasters, interruption to revenue sources, unexpended bond
proceeds, or cancelled projects to almost anything else.
Reinvestment Risk. In a declining interest rate environment, bondholders risk having to reinvest
their interest income and any return of principal, whether scheduled or unscheduled, at lower
prevailing rates.
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