High-yield bonds are debt securities, also known as junk bonds, that are issued by corporations. They can provide a higher yield than investment-grade bonds, but 💎they are also riskier investments.

What Are High-Yield Bonds?

High-yield bonds (also called 澳洲幸运5官方开奖结果体彩网:junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than 澳洲幸运5官方开奖结果体彩网:investment-grade bonds. High-yield bonds are more likely to default, so they pay a higher yield than investment-grade bonds to compensate investors.

Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios. However, some high-yield bonds are 澳洲幸运5官方开奖结果体彩网:fallen angels, which are𒆙 bonds that lost their good credit ratings.

Understanding High-Yield Bonds

A high-yield bond, or junk bond, is a corporate bond that represents debt issued by a firm with the promise to pay interest and return the principal at maturity. Junk boꦍnd🅠s are issued by companies with poorer credit quality.

Bonds are characterized by their credit quality and fall into one of two bond categories: investment grade and non-investment grade. Non-investment-grade bonds, or high-yield bonds, carry lower 澳洲幸运5官方开奖结果体彩网:credit ratings from the leading credit agencies.

A bond is considered non-investment grade if it has a rating below BB+ from 澳洲幸运5官方开奖结果体彩网:Standard & Poor’s and Fitch, or Ba1 or below from Moody’s. Bonds with ratings above these levels are considered investment grade. Credit ratings can be as low as D (in default), and most bonds with C ratings or lower carry a high risk of default.

High-yield🙈 bonds are typically broken down into two subcategories:

• Fallen angels—A bond that has been downgraded by a major rating agency and is headed toward junk-bond status because of the issuing company’s poor credit quality.
• Rising stars—A bond with a rating that has increased because of the issuing company’s improving credit quality. A 澳洲幸运5官方开奖结果体彩网:rising star may still be a junk bond, but it’s headed toward being investment quality.

Advantages of High-Yield Bonds

Investors choose high-yield bonds for their potential for higher returns.

High-yield bonds do provide higher yields than investment-grade bonds if they do not default. Typically, the bonds with the highest risks also have the highest yields. 澳洲幸运5官方开奖结果体彩网:Modern portfolio theory states that investors must be compensated for higher risk with higher expected returns.

Disadvantages of High-Yield Bonds

While high-yield bonds do offer the potential for more gains 澳洲幸运5官方开奖结果体彩网:compared to investment-grade bonds, they also carry a number of risks, like default risk, higher volatility📖, interest rate risk, and liquidity ris﷽k.

Default Risk

Default is itself the most significant risk for high-yield bond investors. The primary way of 🀅dealing with default risk is diversification, but that⭕ limits strategies and increases fees for investors.

With investment-grade bonds, you can buy bonds issued by individual companies or governments and hold them directly. When you hold individual bonds, you can build 澳洲幸运5官方开奖结果体彩网:bond ladders to reduce 澳洲幸运5官方开奖结果体彩网:interest rate risk. Investors can often avoid the fees related to f🤪unds by holding individual bonds. However, the possibility of default makes individual bonds riskier than investing in bond funds.

Higher Volatility

Historically, high-yield bond prices have been significantly more volatile than their investment-grade counterparts. 澳洲幸运5官方开奖结果体彩网:The volatility 🔥of the high-yield bond market is similar to the volatility of the stock market, 🦩unlike the investment-grade bond market, which has much lower volatility.

Interest Rate Risk

All bonds face interest rate risk. This is the risk that market interest rates will rise and cause the price of a bond to decrease. The price of bonds move in 💮the opposite direction of the price of market interest rates.

The longer a bond’s term, the higher the interest rate risk because there is more time for interest rates to change.

Liquidity Risk

澳洲幸运5官方开奖结果体彩网:Liquid assets are ones that you can sell easily for cash. When bonds are traded frequently, they have higher liquidity. 澳洲幸运5官方开奖结果体彩网:Liquidity risk is the risk that you won’t be able to sell an asset at the time and for the price that⛄ reflects the true value of the bonds.

High-yield bonds generally have higher liquidity risk than investment-grade bonds. Even high-yield bond 澳洲幸运5官方开奖结果体彩网:mutual funds and 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs) carry liquidity risk.

Investment Grade vs. Non-Investment Grade

You can typically classify bonds into investment grade and non-investment grade. Bonds are rated by three major ratings agencies: Moody’s, Standard & Poor’s, a🍸𝓡nd Fitch.

When a bond is rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s or Fitch, it is considered investment grade. Bonds rated Ba1 or lower by Moody’s or BB+ or lower by Standard & Poor’s or Fitch are considered non-investment grade.

You’ll want to have a higher 澳洲幸运5官方开奖结果体彩网:risk tolerance for investing in non-investment-grade bonds.

How to Invest in High-Yield Bonds

You can invest in high-yield bo♈nds in several ways:

• You can buy high-yield corporate bonds directly from 澳洲幸运5官方开奖结果体彩网:broker-dealers.
• You can buy into a mutual fund or ETF that holds high-yield bonds.

With the latter strategy, you buy shares of a fund that is managed by a 澳洲幸运5官方开奖结果体彩网:fund manager who chooses which bonds to include.

When researching your choices in high-yield bonds, you can read primary documents like the bond’s 澳洲幸运5官方开奖结果体彩网:prospectus, which provides information about the financial health of the company issuing the bond. It also includes the company’s plans for using the proceeds of the bond, along with the bond terms and risks involved.

The Effect on High-Yield Bonds When Interest Rates ⛄Rise

When 澳洲幸运5官方开奖结果体彩网:interest rates rise, 🌳the market value of high𒅌-yield bonds can decline because investors can get higher returns with newer bonds.

However, rising interest rates can also help high-yield bonds because interest rates tend to increase when the economy expands, so the corporations issuing the bonds can benefit from increased spending. This means that these bonds would have a lower risk of default.

The Bottom Line

Like with any investment, high-yield bonds have risks and rewards to consider. For investors with a ꩲhigh risk tolerance, high-yield bonds may fit their investing goals. These bonds can offer more attractive yields, but they carry more risk and a lower credit rating than investment-grade bonds.

Factor in your indiಌvidual financial situation, including your income, ওnet worth, investment goals, and risk tolerance, when deciding whether high-yield bonds are right for you.