volatility of their spreads. Credit Risk Credit risk is the risk borne by the fixed income investor that the cash flows that the issuer has contracted to pay will not be paid due to the inability or unwillingness of the issuer to do so. Market prices and yields change due to the market's assessment of the probability that the issuer will default on its obligations. If the market believes that the likelihood that an issuer will default has increased, the yield of the bond will go up to compensate for this higher level of risk. Credit risk is usually defined using credit ratings from a nationally recognized statistical rating organization (NRSRO) such as Moody's and Standard & Poor's as shown in Table 24.2. As you can see, historically speculative-grade credits (rated below BBB/Baa) and also known as high-yield or junk bonds) have experienced significantly higher levels of default than investment-grade debt. Volatility Risk Many fixed income portfolios have exposure to volatility risk either explicitly or implicitly. To be exposed to volatility risk is to have the portfolio's value impacted TABLE 24.1 Major Sectors and Historical Volatility of Their Spreads       Historical Annualized Sector Main Risks of Sector Spread Volatility (1 Std. Dev.) Domestic sovereign Interest rate N/A (i.e., U.S. Treasury)     Agency/supranational/ Interest rate, spread 17 bps quasi-government     Mortgage-backed securities Interest rate, spread, 36 bps (MBS) volatility, prepayment   Asset-backed securities (ABS) Interest rate, spread 24 bps Investment grade corporates Interest rate, spread, credit 38 bps High-yield corporates Interest rate, spread, credit 173 bps Emerging market debt Interest rate, spread, credit 409 bps TABLE 24.2 Credit Ratings and Credit Risk   Moody's Rating Standard &c Poor's Rating Historical Default Rate Aaa AAA 0.04% Aa AA 0.10 A A 0.17 Baa BBB 0.39 Ba BB 1.58 B B 4.35 <B <B 8.54