Pros And Cons Of High Yield Bonds

The high yield bond is a bond that features higher returns but with a lower credit rating than typical investment-grade bonds. These bonds can also be referred to as ‘junk bonds’ that are rated as below investment grade by organizations such as Moody’s and Standard and Poor’s. [Appendix #1] Generally, companies that issue high yield bonds may receive their rating due to a few characteristics, such as being less established than typical household brands, showing weak financial performance or they may have suffered a financial setback at some point in their corporate history. Although, high yield bonds may seem to have a relatively negative reputation among investors they possess many attractive advantages which include: diversifying portfolios, greater yields, lower volatility thus makings for a good long-term investment and the fact that bondholders have priority of recovering their money over equity security holders in the case of bankruptcy. These bonds are accessible to investors either as individual issues or through the means of high-yield mutual fund investments. On the other hand, there are certainly risks involved when investing in high yield bonds, such as credit risk where there is the possibility that the issuer defaults on the principal or interest payments over the course of the term and investment in these bonds ultimately depends on how informed the investor is and the amount of risk the investor is willing to tolerate. Similar to other types of securities there is always the threat of economic downturn and risks occurring when investing in international markets, such as political and exchange rate risks. In contrast, high yield bonds are able to mitigate interest rate risks better, and are less vulnerable to drast...

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...and the market as a whole.

Also, the usage of high yield bonds securities for financing became popular during the 1990s in foreign markets such as Latin America, Asia, and Europe showing the rise in international appeal for these kinds of securities. However, outside of the U.S the high yield market has taken a longer time to become popular and thus there is still room for the development of high yield bonds within financial markets in emerging countries. It is safe to determine that the market for high-yield bonds will always be in existence since it is a viable alternative for many fast growing firms to acquire financing and is a rewarding option for investors. The key to the still growing, strong market demand for high yield bonds is based on linking the [U.S.] economy’s constant desire for capital with investors’ desire for higher returns on their investment.