What Are High-Yield Bonds?
First Time Visitor? Welcome
FinancialLearn.com is dedicated to finding great deals, free stuff, and promote frugal living. We are delighted to have you here.
Sound Fun? Have our articles delivered to you via RSS Feed or E-mail to be reminded of new and upcoming contests and articles.
High-yield bonds have commonly been referred to as ‘junk’ bonds because they are typically issued by a company who is considered a high credit risk. The grading agencies have given high-yield bonds that name and they have traditionally been considered investments that are speculative. The chance of defaulting on high-yield bonds is higher than that of standard bonds which tends to make even high-yield bonds a form of credit risk. What is interesting to note, however, is that high-yield bonds have higher returns which compensates for the chance the lender is taking.
The name ‘junk’ bonds, as mentioned earlier, came from the established grades bonds have been giving by a variety of credit rating agencies. This was developed to help investors identify the chances of getting their money back on the bond they invested in. The highest bonds are rated ‘AAA’ and the lowest is a ‘D’ for default. Anything that is rated ‘BB’ or lower is considered speculative grade bonds and high-yield bonds fall into this category. ‘BB’ and lower all carry a high risk of default.
High-yield bonds quickly got a bad rap as many financial institutions began to use the rating system that was developed. They were not used in most investment portfolios and high-yield bonds were avoided like the plague by both investors and investment dealers. If you held a high-yield bond, you accepted the risk that the issuer would default and you would be out of the money the high-yield bond was issued for. Prior to the 1980s, high-yield bonds were only issued by companies and organizations that once were investment grade issuers.
Upon further study by investment firms it was found that high-yield bonds were actually worth the risk. The returns on high-yield bonds turned out to be very high and that meant that the risk was indeed a viable option. When investors began to realize that high-yield bonds were worth the risk, underwriters began to get into the high-yield bond business. They began to accept high-yield bonds from issuers with less than stellar credit. While this rush of ‘junk’ bond issues in the 1980s caused a scandal and collapse, the use of high-yield bonds bounced back in the 1990s and is actually thriving today. As a matter of fact, there have been many mutual funds invested into high-yield bonds which are doing well with their high risk-adjusted returns.
High-yield bonds are now primarily used for companies with credit issues or who need financing that other traditional methods cannot meet. High-yield bonds are invested using a credit analysis that concentrates on the bond issuer’s company characteristics. They are usually diversified by industry and issue type. Anyone interested in investing in a high-yield bond is advised to do so through a high-yield mutual fund and use the help of a professional to maximize their high-yield bonds investment.
Popularity: 17% [?]
Related Posts
- Understanding the High-Yield Bond Market
- Who Issue’s High-Yield Bonds?
- The Benefits of High-Yield Bonds
- The Different Types of High-Yield Bonds
- Oil Investing- High Risk and High Returns
- The Advantages of Municipal Bonds
- How to Buy Municipal Bonds
