High yield bonds are bonds with exceptionally high yield rates which are issued by corporations or governments with poor creditworthiness. These bonds are also referred to as junk bonds or non-investment-grade bonds because they carry a higher risk of default than other bonds.
Because borrowers with poor creditworthiness find it difficult to convince lenders that they are a good investment, they are willing to offer much higher interest rates than borrowers with good creditworthiness.
The higher amounts of interest paid out to investors compensate for possible delays or defaults on interest payments. However, borrowers may also default on the repayment of bond principal at the end of the bond term due to lack of capital or bankruptcy. For this reason, high-yield bonds are considered a high-risk investment vehicle and are not recommended for unexperienced investors.
Examples of high-yield bonds may include government bonds issued by governments with poor credit ratings, municipal bonds issued by municipalities with poor creditworthiness, corporate bonds issued by companies with poor credit ratings, and bank bonds issued by banks with poor credit ratings. See also: Rating agency.
Experienced investors may consider including high-yield bonds in the high-risk portion of their investment portfolio. However, as with other high-risk investments like illiquid stocks, initial coin offerings, cryptocurrencies and contracts for difference (CFDs), high-yield bond investments should be balanced with low risk investments such as bonds issued by governments and companies with good creditworthiness or medium-term notes issued by banks with strong credit ratings.