High-yield bonds, also called junk bonds, are bonds that yield more in interest income than other types of bonds because they are of lower quality. The high yield compensates investors for the additional risk they take with their money by buying low-quality bonds. High-yield bonds may be corporate, municipal or foreign. They can be a lucrative investment if bought at the right time.

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Two Sources of High-yield Bonds

High-yield bonds come from two sources: They are either issued with a high-interest coupon or become high-yielding because their price falls. A financially weak company or government entity must pay more interest to compensate investors for the additional risk. But sometimes a solid company or a government entity may run into financial trouble and its bonds will drop in price. Since bond interest is fixed, a drop in a bond’s price results in a higher yield.

High-yield Bond Risks

Best Time to Buy High-yield Bonds

References

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