Also known as junk bonds, these are debt securities that offer higher interest rates to investors due to their lower credit ratings compared to investment-grade bonds. High-yield bonds are issued by companies or entities with a higher risk of defaulting on their debt obligations. Because of this increased risk, investors demand higher yields to compensate for the potential loss of principal.
High-yield bonds can be attractive to investors seeking higher returns, but they come with a higher level of credit risk. The term “junk bonds” reflects their riskier nature, but it’s important to note that not all high-yield bonds are necessarily bad investments; some investors are willing to accept the risk for the potential reward. However, due diligence and careful consideration of the issuer’s financial health and market conditions are crucial when investing in high-yield bonds.