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High yield bonds

High yield bonds have a higher risk of default but typically pay higher yields than bonds of better quality.

​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

  1. 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.
  2. 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.
 

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