What are high-yield bonds?

Imagine a bond with higher rates because of lower credit ratings than investment-grade bonds. That’s called a high-yield bond. They are often offered by start-up companies or capital-intensive firms with high debt ratios.

The truth is that they are more likely to default, so they must pay a higher yield than investment-grade bonds. The categorization of bonds is according to their credit quality. These are namely high-yield and investment grade.

I like the language used in categorizing high-yield bonds. It reads like something from a book or movie. When you call a bond “fallen angel”, it implies that it was formerly an investment-grade bond. The status of the bond reduces when the issuing company has a poor credit rating.

“Rising star” is a bond with a rating that has increased due to the issuing company’s improved credit rating. It can still be below par, though headed towards the recovery of investment quality.

Why High-Yield Bonds?

If you can get 150-300 basis points in additional yield when compared to investment-grade bonds, then you would agree that high-yield is a good enough investment, no matter what risks it portends. 

I would recommend for investors to mind what money they intend to invest. Sometimes, it is advisable to put in only loose change, instead of all the money at your disposal (for investment).

The high returns are another advantage, and it is why high-yield bonds are a good enough look. They offer higher coupons than government bonds. They also have the potential for price appreciation, especially when there is an improvement in the economy or the issuing company. 

Also, the allocation of high yield bonds may provide portfolio diversification benefits. It also offers similar returns to equity markets though it has lower volatility.

Conclusion

Investing in high-yield bonds may seem like a lot of risks. In reality, every kind of investment holds some level of risk for investors. What matters is the competence of your investment advisor and what level of risk you are willing to take on. 

High-Yield bonds are not all about risk. Most times, they are more of an investment opportunity than they are risky. At Zimvest, we offer the finest level of curated investment opportunities. 

High-yield bonds are some of the opportunities we offer, and we will ensure a professional investment plan that takes care of your capital.

Visit us at www.zimvest.com.ng for more information.