High yield bonds are securities which are given lower ratings than those usually issued for other forms of investments. These bonds may be issued by either governments, private corporations, or other financial institutions. Credit rating agencies are in charge of setting the rating for such bonds. For example, Standard & Poor’s usually sets credit ratings for such securities below BBB.
As the name suggests, high yield bonds usually come with higher interest rates, which translates into greater payouts for the benefit of investors. However, with this potential for higher gains also comes the risk that investors will not receive the principal amount or the interest on time. Since high risk bonds are at a greater risk for default, they are not considered to be on the same level as investment grade bonds and are oftentimes labeled as junk bonds.
Taking their knowledge of both the potential gains and risks that high yield bonds carry, investors then have to consider a variety of other factors before deciding on whether to invest or not. These factors, such as the current condition of the market, economic changes and trends, as well as the status of the issuing entity will also give investors an idea regarding the chances for the bond to provide favorable results. Another thing investors may have to consider is the fact that high yield bonds are usually callable. This simply means that the corporation or agency which issued it has the right to buy the bonds back after a certain period of time. The price at which the bond is to be bought back will have already been stated from the very start.