Some bonds are known as “high-yield bonds” because they offer higher returns to investors. You might hear high-yield bonds referred to as “junk bonds” or “non-investment grade bonds.” High-yield bonds are riskier compared to other bonds, so they compensate investors for the additional risks by offering a chance for higher returns.
What are high-yield bonds?
High-yield bonds are corporate bonds issued by companies that are at a higher risk of defaulting on their debt. Companies or governments often finance their debt by issuing bonds. Simply put, when you buy a bond, you become a lender.
How do high-yield bonds work?
Generally, the company works with an investment bank to craft a high-yield bond offering. Once the terms are set, the bonds are offered to investors. Any bonds sold before maturity go to the secondary market through brokers and traders to be offered to investors.
What are the risks of high-yield bonds?
Investors seek high-yield bonds for the potential of higher returns, especially during times when interest rates are low. However, there are several types of risks you should be aware of.
How can I invest in high-yield bonds?
If you believe the potential returns are worth the risk, you can buy high-yield bonds in several ways. You can invest in individual high-yield bonds by purchasing them directly from banks or brokers. However, due to the high default risk of low-rated companies, buying individual bonds is considered a risky investment method, as your money is tied up in one company. Before investing in individual high-yield bonds, make sure to read the company’s prospectus on the SEC’s EDGAR site to get a better understanding of the company’s financial situation.
You can also invest in high-yield bond funds, whether they be mutual funds or high-yield exchange-traded funds. These funds distribute default risk when investing in non-investment grade bonds.
Frequently Asked Questions
What are high-yield bonds?
How can I buy high-yield bonds?
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Sources:
Fidelity. “Bond Ratings.”
SP Global Indices. “S&P U.S. High-Yield Corporate Bond Index,” Click “10 YEAR” above graph.
SP Global Indices. “S&P 500 Investment Grade Corporate Bond Index,” Click “10 YEAR” above graph.
SP Global Indices. “S&P 500,” Click “10 YEAR” above graph.
Treasury.gov. “Daily Treasury Yield Curve Rates.”
State Street Global Advisors. “SPDR Bloomberg Barclays High-Yield Bond ETF.”
Source: https://www.thebalancemoney.com/the-basics-of-investing-in-high-yield-bonds-417068
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