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What are High Yield Bonds

High yield bonds, also known as junk bonds, are a type of bond that is issued by companies with lower credit ratings. These bonds offer higher yields to investors compared to investment-grade corporate bonds in order to compensate for the increased risk of default.

Characteristics and Benefits of High Yield Bonds​

High yield bonds have several characteristics that make them attractive to certain types of investors. One key feature is their high yield, which can range from 5% to over 10% per annum. This makes them more appealing to investors seeking higher returns compared to lower-yielding investment-grade bonds.

Who Issues High Yield Bonds?​

High yield bonds are typically issued by companies with lower credit ratings, often below BBB- (S&P) or Baa3 (Moody's). These companies may be smaller, growing rapidly, or operating in industries with high debt levels. Some examples of issuers include:

  • Smaller corporations
  • Startups
  • Companies undergoing restructuring

What Are the Risks Associated with High Yield Bonds?​

Investors should be aware that high yield bonds come with higher credit risks compared to investment-grade bonds. This means there is a greater chance of default, which can result in investors losing some or all of their principal.

How Do High Yield Bond Yields Compare to Other Investment Options?​

Compared to other investments like stocks and commercial paper, high yield bond yields are generally lower. However, they tend to be higher than those offered by longer-term investment-grade corporate bonds. Investors should carefully weigh the trade-off between potential returns and risk when considering high yield bonds.

Are High Yield Bonds Suitable for All Investors?​

High yield bonds may not be suitable for all investors due to their higher credit risks. Typically, these bonds are more appealing to:

  • Experienced investors who can assess risk better
  • Those seeking higher yields
  • Investors with a longer investment horizon