Investing in bonds can be a great way to diversify your portfolio and generate a steady stream of income. High-yield bonds, also known as “junk bonds,” are a type of bond that typically offer higher yields than other types of bonds but come with a higher risk of default. Despite their higher risk profile, high-yield bonds can be an attractive investment option for investors looking to boost their portfolio returns. In this post, we’ll take a closer look at high-yield bonds, including what they are, how they can be traded, and the benefits and cons of investing in them.
What are High-Yield Bonds?
High-yield bonds are corporate bonds issued by companies with lower credit ratings than investment-grade companies. These companies are considered more likely to default on their debt obligations, which is why high-yield bonds are sometimes referred to as “junk bonds.” Because of their higher risk profile, high-yield bonds generally offer higher yields than other types of bonds.
How can High-Yield Bonds be Traded?
High-yield bonds can be traded in the same way as other types of bonds. Investors can buy individual bonds or invest in a high-yield bond fund or exchange-traded fund (ETF) that holds a diversified portfolio of high-yield bonds. High-yield bond funds and ETFs can offer investors the benefit of diversification, which can help mitigate some of the risks associated with investing in individual high-yield bonds.
Benefits of Investing in High-Yield Bonds:
The primary benefit of investing in high-yield bonds is the potential for higher yields compared to other types of bonds. This can be especially attractive for income-seeking investors, such as retirees or those looking to supplement their income. Additionally, high-yield bonds can provide diversification benefits to a portfolio, as they have a low correlation with other asset classes.
Cons of Investing in High-Yield Bonds:
The biggest risk associated with investing in high-yield bonds is the higher risk of default. Because high-yield bonds are issued by companies with lower credit ratings, they are more likely to default on their debt obligations than investment-grade bonds. Additionally, high-yield bond prices can be more volatile than other types of bonds, which means that they can experience significant price swings in response to changes in market conditions.
Investing in high-yield bonds can be a potentially rewarding but risky investment strategy. While they offer the potential for higher yields, investors should be aware of the higher risk of default associated with these bonds. For investors looking to add high-yield bonds to their portfolio, investing in a diversified high-yield bond fund or ETF can help mitigate some of the risks associated with investing in individual high-yield bonds.
Investopedia: High-Yield Bond
The Balance: High-Yield Bond (Junk Bond) Definition