Investors seeking higher returns in a low-interest-rate world are increasingly turning to high-yield bonds. These bonds, also known as junk bonds, offer a potentially higher income stream compared to investment-grade bonds and government securities.

Understanding High-Yield Bonds

High-yield bonds are debt securities issued by companies with lower credit ratings. These companies are considered to have a higher risk of default, which is why they offer higher yields to compensate investors for the added risk.

Benefits of Investing in High-Yield Bonds

• Higher Returns: High-yield bonds typically offer significantly higher yields than investment-grade bonds.
• Diversification: Adding high-yield bonds to a portfolio can improve diversification.
• Potential for Capital Appreciation: If the issuer’s credit rating improves, the value of the bond may increase.

Risks of Investing in High-Yield Bonds

• Higher Default Risk: Companies issuing high-yield bonds are more likely to default on their debt obligations.
• Interest Rate Sensitivity: High-yield bonds can be sensitive to changes in interest rates.
• Liquidity Risk: High-yield bonds may be less liquid than investment-grade bonds.

Before investing in high-yield bonds, investors should carefully consider their risk tolerance and investment objectives. It is also important to conduct thorough research on the issuer and the specific bond offering.