return but also a relatively high chance of defaulting on the payments are called high-yield or junk bonds. The

bond yield is the rate of return that a bond promises to pay at the time of purchase. Even when bonds make

payments based on a fixed interest rate, they are somewhat risky, because if interest rates rise for the economy

as a whole, an investor who owns bonds issued at lower interest rates is now locked into the low rate and

suffers a loss.

Changes in the stock price depend on changes in expectations about future profits. Investing in any individual

firm is somewhat risky, so investors are wise to practice diversification, which means investing in a range of

companies. A mutual fund purchases an array of stocks and/or bonds. An investor in the mutual fund then

receives a return depending on the fund's overall performance as a whole. A mutual fund that seeks to imitate

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17 • Self-Check Questions 431
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