Purchasing high-yield corporate bonds typically require investors to do more research on the bonds prior to making investments. Some tips for choosing the best high-yield corporate bonds include ignoring bond ratings to a certain degree, researching companies and assessing the risks associated with the high-yield corporate bonds, as well as the risks associated with the company. Credit rating agencies can provide some guidance on these investments, but investors typically ignore these, as they are willing to accept more risk for higher returns.
High-yield corporate bonds are typically those sold by companies that have lower bond ratings from professional ratings firms. Bonds below the investment grade may carry names such as non-investment grade, junk bonds or speculative-grade bonds. This does not mean investors cannot purchase the bonds; it simply means the company does not have the proper credit to satisfy rating agencies. Bond ratings are an indicator of a company’s credit worthiness to repay bonds. This does not always mean the company cannot repay or has had trouble repaying investments in the past. In reality, the rating indicates the potential ability for a company to repay bonds sold to investors.
Risks associate with high-yield corporate bonds may relate specifically to an investment in a project or new business venture. The outside funds generated from bond sales is often necessary to pay for the major investment, as the company will typically not have the cash on hand to pay for the project in its entirety. Investors should carefully review the risk factors for the individual projects for which the company is selling bonds. Bonds sold to help the company stay afloat financially are typically riskier because the company is on poor financial footing. Entering new markets with high competition or excessive government regulation can result in fewer profits for the company. This reduces its ability to repay bonds sold to investors.
Investors should also make their own reviews into a company’s operations when looking to purchase high-yield corporate bonds. Companies poorly insulated from risks, such as foreign competition, national economic downturns or faulty production processes, can increase the risk of losing money invested in corporate bonds. Companies in certain industries can also be more susceptible to failure. For example, pharmaceutical companies awaiting approval from government agencies for new drugs can be extremely risky investments. Failure to achieve the approval can quickly halt the company’s operations and result in a loss of profits, which will reduce the company’s ability to repay bonds. Investors must take this information into account when looking to purchase extremely risky bonds.