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