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Types of Bonds

Investing in High-Yield Bonds

The high-yield bond market has grown rapidly during the 1990s, in part because these securities help meet the needs of a diverse array of investors. Some of the main attractions of the high-yield bond market for investors are:

  • a high rate of current income associated with their high interest rates,
  • the potential for capital appreciation if the debt is upgraded by one of the credit rating agencies, and
  • precedence of legal rights over common and preferred stock in the event of the liquidation of the issuer, which affords some “cushion” of protection.

However, due to their credit quality, which is lower than that of instruments like U.S. Treasury bonds or high-grade corporate bonds, high-yield bonds involve greater risk. You should evaluate whether the returns justify such incremental risks as:

  • High-yield bond prices may decline in the event of a recession.
  • A bond may default if the issuer does not pay the interest or principal as required.
  • A bond’s price may decline if the issuing company’s credit rating is lowered.
  • A bond’s price may decline if interest rates rise.
  • A bond’s price may decline because of unexpected news or financial results at the issuing company, or within the company’s industry.
  • An investor may have difficulty locating a buyer at certain times, as high-yield bonds can sometimes be “less liquid” than investment-grade bonds.

Both the benefits and the risks to the investor are discussed in greater detail later.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.