What Are High-Yield Bonds?

​Do you know what high-yield bonds are? Generally, they are attractive to investors because they offer high yields and other benefits. But is that enough to justify the risk? Keep reading to find out.

Definition of High-Yield Bonds
High-yield bonds are debt securities that offer higher interest rates than standard bonds but with a lower credit rating. This means they can only be purchased and held by high credit risk investors who may be more willing to take on this risk.

Specifically, investors usually buy these bonds because they expect them to increase in value by paying off their interest payments on time. Some of the profit is reinvested into subsequent new high-yield bonds.

High-Yield Bonds Investors
The high-yield bond market comprises a variety of investors who participate. These investors include the following but are not limited to:

Individual Investors
Individual investors purchase high-yield bonds on their own, but they also have access to this market through high-yield bond mutual funds and exchange-traded funds.

Mutual Funds
A mutual fund is a separate account that pools investors' assets to create portfolios of high-yield bonds. Mutual funds are often run by independent investment companies but can also be owned by banks or other financial institutions that deal in large blocks of stock certificates. 

They are generally sold as shares rather than certificates and can be purchased directly from the fund company's website or through a broker or advisor.

Insurance Companies
Insurance companies invest their capital as well as the funds of their customers in high-yield bonds. These investments have high returns but with risks that vary from one bond issue to another: they differ in maturity dates, and their interest rates might change over time.

Why Invest in High-Yield Bonds?
Your portfolio could benefit by investing in high-yield bonds with higher yields than other bonds. Here’s why:

Portfolio Diversification
High-yield bonds may help you diversify your portfolio because they have historically provided high returns for investors.

High-Interest Rate
High-yield bonds carry a higher interest rate. An investor buying a bond with a higher yield might have the chance to make a lot more money because they're taking on less risk.

Greater Yields
High-yield bonds are attractive to investors, offering much higher yields than most investment-grade and government bonds. In times of economic uncertainty, high-yield securities tend to perform well as companies seek capital to cover operating expenses.

Conclusion
Hopefully, this guide helped you figure out what high-yield bonds are and where investing in them can be an effective investment strategy. 

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