A high yield bond is a bond that offers a higher interest rate than average government or investment grade corporate bonds. It is issued by a company or entity with a lower credit rating, which means there is a higher risk that the issuer may not fully repay its debt.
image_here
High yield bonds compensate investors for taking on greater credit risk.
Because the issuing company may have higher debt levels, unstable earnings, or operate in a more uncertain industry, investors demand a higher yield as compensation. The price of high yield bonds can be more volatile than that of higher rated bonds, especially during economic downturns. If economic conditions weaken, the risk of default may increase, causing bond prices to fall.
However, during periods of strong economic growth, high yield bonds can provide attractive returns compared to safer bonds. Investors must carefully assess both the potential income and the default risk before investing.
Short example:
Suppose a stable government bond pays 3 percent interest per year.
A company with a lower credit rating issues a bond paying 8 percent interest.
Investors receive the higher yield because there is a greater chance that the company could face financial difficulties in the future.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.