High-yield bonds, also referred to as junk bonds or speculative-grade bonds, are fixed income securities that are issued by companies with below-average credit ratings. Unlike investment-grade bonds, which are considered higher-quality and lower-risk investments, high-yield bonds have a higher probability of default. This increased risk is reflected in their higher interest rates compared to investment-grade bonds.
High-yield bonds are typically issued by companies that have limited financial stability, weakened credit profiles, or may be involved in a restructuring or turnaround situation. These companies usually have a higher level of debt or have not yet established a consistent track record of generating sufficient cash flows to repay their debts.
Due to their perceived higher risk, high-yield bonds offer a higher return potential to compensate investors for taking on this additional risk. Investors are attracted to these bonds in the hopes of earning higher yields, which can enhance their overall portfolio returns.
However, investing in high-yield bonds comes with increased uncertainty and the potential for higher volatility, as the risk of default or bankruptcy is greater. Therefore, it is crucial for investors to conduct thorough analysis and due diligence to mitigate potential risks before investing in high-yield bonds.
Overall, high-yield bonds occupy a space in the bond market where companies with below-average credit ratings can access capital through debt financing, while investors seek higher returns in exchange for accepting higher credit risk.
