High yieldYield Your yearly return on an investment. It’s often stated as a percentage, such as 5%. With stocks, yield can be your yearly income from dividends. With bonds, it’s the interest you get.+ read full definition (or “junk”) bonds are corporate bonds issued by companies that have been given low credit ratings (BB or lower) by a credit ratingCredit rating A way to score a person or company’s ability to repay money that it borrows based on credit and payment history. Your credit score is based on your borrowing history and financial situation, including your savings and debts.+ read full definition 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 bondsHigh yield bonds Offer a higher return, like some equities, but with lower risk. Note: overall rating for risk is higher than other types of bonds, or sometimes not rated.+ read full definition through mutual funds or ETFs. While diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition 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 debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition 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 incomeFixed income An investment that pays regular income to you. Examples: Guaranteed Investment Certificates, Canada Savings Bonds and types of other bonds.+ read full definition investments, they have significant more risk than traditional corporate or government bonds.
High yield bonds have a credit rating of BB or lower.