High yield (or “junk”) bonds are corporate bonds issued by companies that have been given low credit ratings (BB or lower) by a credit rating agency.
These companies are deemed more likely to have trouble meeting their financial commitments so their bonds have a higher risk of default. To offset that risk, the bonds offer investors a much higher yield.
Many investors choose to buy high yield bonds through mutual funds or ETFs. While diversification can help reduce risk, these funds can still be highly volatile.
2 key risks
- Risk of default – Some of these companies are facing hard times, such as high debt or uncertain prospects that have caused credit rating agencies to lower their rating. If a company goes into default, its high yield bonds may become worthless.
- Highly volatile – High yield bonds can be as volatile as stocks. Even though they are fixed income investments, they have significant more risk than traditional corporate or government bonds.
Fast facts
High yield bonds have a credit rating of BB or lower.
