Prospectus - USAA

the date of issue. The period of “call protection” may be longer or shorter
than 10 years, but regardless, bonds purchased closest to the date of issue
will have the most call protection. Typically, bonds with original maturities
of 10 years or less are not callable.
Although bond prices rise when interest rates drop, falling interest rates
create the environment necessary to “call” the higher-yielding bonds from
your Fund. When bonds are called, a Fund is affected in several ways. Most
likely, we must reinvest the bond-call proceeds at lower interest rates. The
Fund’s income may drop as a result. The Fund also may realize a taxable
capital gain.
Credit Risk: Credit risk is the possibility that an issuer of a fixed-income
instrument will fail to make timely interest and principal payments on its
securities or that negative market perceptions of the issuer’s ability to make such
payments will cause the price of that security to decline. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capability to make principal and interest payments on these securities than is the
case for higher-rated securities. When evaluating potential investments for a
Fund, our analysts also assess credit risk and its impact on the Fund’s portfolio.
Nevertheless, even investment-grade securities are typically subject to some
credit risk. Securities in the lowest-rated investment-grade category have
speculative characteristics. In addition, the ratings of securities are estimates by
the rating agencies of the credit quality of the securities and may not take into
account every risk related to whether interest or principal will be repaid on a
timely basis. Lower credit ratings correspond to higher credit risk and higher
credit ratings correspond to lower perceived credit risk. Credit ratings do not
provide assurance against default or other loss of money. In addition, ratings and
market value may change from time to time, positively or negatively, to reflect
new developments regarding the issuer. If a security has not received a rating, a
Fund must rely entirely upon the Adviser’s credit assessment.
Securities rated below investment grade (junk or high-yield bonds) should be
regarded as speculative, because their issuers are more susceptible to financial
setbacks and recession than more creditworthy companies. If a Fund invests in
securities whose issuers develop unexpected credit problems, the Fund’s NAV
could decline. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capability to make principal and interest payments
on these securities than on higher-rated securities.
Interest Rate Risk: As a mutual fund investing in bonds, each Fund is subject
to the risk that the market value of the bonds in a Fund’s portfolio will fluctuate
because of changes in interest rates, changes in supply and demand for taxexempt
securities, or other market factors. Bond prices are linked to the
25 | USAA California Funds