description High-Yield Corporate Bonds Overview
These bonds are issued by corporations with lower credit ratings, offering higher coupon payments to compensate investors for increased default risk. They serve as an income booster in a portfolio, providing cash flow that equity alone might not match. While riskier than government bonds, they offer better yield potential, making them suitable for investors prioritizing current income over capital preservation.
help High-Yield Corporate Bonds FAQ
What makes a corporate bond high yield?
A high-yield bond is issued by a company whose credit rating is below investment grade. Rating systems commonly place this below BBB- from S&P or Fitch, or below Baa3 from Moody's.
Why do high-yield corporate bonds pay more interest?
The higher coupon is compensation for a greater chance of missed payments or default compared with investment-grade corporate debt. The extra yield is not free income because the bond price can fall sharply when the issuer or economy weakens.
Can high-yield bonds lose money even if they pay coupons?
Yes. Rising interest rates, widening credit spreads, or a company downgrade can reduce the market value of the bond, even while coupons continue. A default can create a much larger loss.
How are high-yield bonds different from shares?
Bondholders have a contractual claim for interest and principal, while shareholders own an equity stake and usually receive dividends only if declared. In a bankruptcy, bondholders generally rank ahead of common shareholders, but recovery is not guaranteed.
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