| High yield bonds are bonds issued by corporations. | | | | market and lack of liquidity is not a huge concern. |
| These companies pay interest rates higher than | | | | 3. High yield bonds are not perfectly correlated |
| those of top quality government or corporate | | | | with other investment categories. |
| bonds to attract investors. Corporate assets back | | | | 4. High yield bonds have to earn higher returns in |
| the bonds; incase of default, the bondholders have | | | | order to compensate investors for higher risk. |
| a legal claim on those assets. | | | | High yield bonds tend to combine the higher |
| To understand high yield bonds, let's define what a | | | | returns associated with equities and the lower risk |
| bond is. A bond is an interest-bearing investment | | | | associated with bonds. |
| that obliges the borrower to pay a specific | | | | 5. These bonds will fluctuate based on more than |
| amount of interest for a specific period of time | | | | just the direction of interest rates; they will also |
| and then at maturity to repay the investor the | | | | increase or decrease in value as the issuing |
| original amount of the loan. High yield bonds are | | | | company improves its financial performance. |
| bonds issued by corporations. These companies | | | | During the previous five years, high yield bonds |
| pay interest rates higher than those of top quality | | | | have generated superior returns compared to |
| government or corporate bonds to attract | | | | more conservative bond funds. However, these |
| investors. Corporate assets back the bonds; | | | | returns are less than those of some aggressive |
| incase of default, the bondholders have a legal | | | | equity funds. Investors should invest a portion of |
| claim on those assets. High yield bonds can offer | | | | their portfolio in this investment category to |
| many advantages: | | | | reduce their risk and increase their income and |
| 1. As the name implies, high yield bonds frequently | | | | return potential. High yield bonds play an important |
| have higher yields. They can be called (redeemed) | | | | role in a well-diversified mutual fund portfolio for |
| earlier, which is one reason investors receive | | | | both the conservative and aggressive investors. |
| higher interest payments. In general these bonds | | | | This sector will still incur risk; but the worst |
| have shorter maturities. Downturns in this | | | | downside risk displayed by this investment |
| investment category have not been as dramatic | | | | category was a loss of 8 percent. Investors who |
| as in other investment categories. | | | | want to capitalize on the opportunities of high yield |
| 2. High yield bonds have become a large global | | | | bonds could consider several mutual funds. |