High-yield corporate bonds are a form of investment bond that presents an opportunity for higher than normal returns, or yields, at a higher than normal risk rate. There are both benefits and risks to investing in high-yield corporate bonds, that must be carefully considered before money is risked. Investment experts generally do not recommend creating a portfolio based entirely or largely on high-yield corporate bonds, but many suggest that they can be a lucrative part of a diversified investment portfolio.
Investments are graded based on risk and results by several independent analysis groups that are used as standards market-wide. The highest grade, AAA, denotes a company that offers the best chance of returns with the lowest amount of risk. AAA, AA, A, and BBB are the four top investment brackets. A high-yield corporate bond is one that is offered by a company rated below BBB; it is usually considered a speculative investment that may or may not pay off.
The benefits of a high-yield corporate bond are based on the fact that it comes from a company perceived to be in trouble. This may be a formerly high-performing corporation fallen on hard times, or a newer corporation that has not yet created a successful track record of positive returns. Since these corporations are perceived as long-shots for success, they are often cheap to buy. This means that if the company takes off after bonds are purchased, the investor stands the chance of making far more money than on a higher-priced bond that is more stable but may offer comparatively moderate returns.
A lower investment grade, on the other hand, can indicate a serious issue with the company and engenders a far higher risk of problems. One of the biggest worries of investing in high-yield corporate bonds is that the company will go under and default on its bonds, meaning that the investor now holds worthless bonds that will not be paid back. Additionally, if an already-struggling company appears to be on a track spiraling toward death, the bonds may lose liquidity, meaning they may be much harder to sell to other investors.
The companies that offer high-yield corporate bonds also retain the right to call bonds before a stated maturation date. This means that, if the company starts making money, the company can buy back its bonds before the interest soars to its peak. This saves the company from losing profit to skyrocketing interest rates, but also means the investor can lose out on the top level of yield.