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What is a High-Yield Bond Index?

Jim B.
Jim B.

A high-yield bond index is a statistical measurement used to show the performance of the high-yield bond market as a whole. The index is usually measured in terms of points and is best judged in conjunction with past index readings to determine a trend in the market. High-yield bonds generally return higher interest payments to investors than other debt instruments like investment-grade corporate bonds. These bonds included in a high-yield bond index also carry a great risk to investors, as the corporations who offer them often have poor credit ratings and are thus susceptible to defaulting on their debt.

When an investor buys a bond, he is essentially giving a loan to the issuer of the bond. In return, the investor expects a return of the principal at the end of the term of the bond as well as regular interest payments. Corporations use these bonds as a way to raise capital for their business operations. Such bonds that offer high interest payments to investors are usually contained on a high-yield bond index.

Woman holding a book
Woman holding a book

Many market agencies offer their own version of a high-yield bond index for investors to analyze. Any market index takes all of the securities in a particular sector of the market and groups them together. It then comes up with an average of the performances of all of the included securities, which is usually registered in terms of points. If a particular index is up in points from a previous day, it's an indication that the sector of the market represented by the index is on the upswing, and the opposite is true if the points are down.

The lure of the bonds included in a high-yield bond index to investors is that they offer a significant boost in interest returns when compared to other debt instruments. This makes high-yield bonds a particularly lucrative form of investment if an investor can choose the right ones to buy. Other investors prefer the relative safety of mutual funds containing high-yield bonds. These funds mitigate the risk of certain bonds under-performing.

If a bond is included in a high-yield bond index, it means that it has received a low credit rating. This means that the corporation issuing the bond runs a greater risk of defaulting on its obligations to investors than the corporations that offer investment-grade bonds. For that reason, the issuers of high-yield bonds have no choice but to offer high interest to investors who demand such a reward for taking on the risky bonds.

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