high-yield bond
A bond rated below investment grade (BB or lower), offering higher interest rates to compensate for higher default risk. Also called a junk bond.
Example
“The startup raised capital by issuing high-yield bonds at 9%, while AAA-rated companies borrowed at 4%.”
Memory Tip
High YIELD = HIGH RISK. They pay more because they might not pay at all.
Why It Matters
High-yield bonds can significantly boost your investment returns, but they also carry substantial risk of losing your money if the issuing company fails. Understanding this risk-reward tradeoff is crucial when building a diversified portfolio and deciding how much of your money to allocate to these riskier securities.
Common Misconception
Many investors assume that high-yield bonds are always a bad investment because they are called junk bonds. In reality, some high-yield bonds are issued by stable companies in temporary financial difficulty, and the higher interest rates can provide excellent returns if you research the issuer carefully and the company recovers.
In Practice
Suppose a struggling retail company issues bonds paying 10 percent annual interest while a stable utility company pays only 3 percent. If you invest 10,000 dollars in the retail bond, you receive 1,000 dollars yearly in interest, but you risk losing your entire investment if the company goes bankrupt. By contrast, the utility bond gives you only 300 dollars annually but is much more likely to be repaid in full.
Etymology
Bonds with HIGH YIELD (return) — because of the higher risk of default.
Common Misspellings
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