High-Yield Debt

By: EconomyWatch Content   Date: 29 January 2010

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High yield debt or high risk bond, as the name suggests, are high paying bonds. These bonds usually have a poor credit rating and in order to attract buyers/lenders, offer a lot of initial discounts that translate into higher rewards after maturity.

 

High yield bonds are usually categorized by non-investment grades, which are assigned by credit rating agencies after looking at the issuers’ financial health. Most high yield bonds have a rating of ‘BBB’ or BAA (Moody’s). Many may even come with rating as low as ‘C’ or ‘D’.

 

Most Portfolios Have High Yield Debt

As strange as it may sound to you, but the fact is most portfolios, even those of mutual funds, which are considered one of the safest investments, have a fair share of high yield bonds. High yield debt/bonds are often preferred over other securities and bond as they diversify the portfolio to both ends of the financial spectrum and thus minimize risk. Being high yield bonds, they also have the potential of windfalls.

 

In fact, as per experts, investors may expect at least 150-300 points bigger yield than the investment grade bonds.  

Advantages of Investing In a High Yield Debt/Bond

 

Firstly, investing in a high yield debt/bond doesn’t mean that you are investing in a bad company. All it means is that it could have been a bad financial year for the company, as was the case with Ford and General Motors when they got sub-investment grades in 2005.  In general, high yield bonds produce better results than government bonds or highly rated corporate issues.

 

Secondly, not many know that high yield bonds are best protected against bankruptcy. If at all, the issuer goes bankrupt, high yield investors get remitted before stockholders. This security outdoes all other benefits other forms of issues from the same company may offer. Also, by the virtue of this security, high yield bonds offer the best diversification.

 

Another advantage that is mostly overlooked is the amount of flexibility the fund managers get to explore the different high yield bonds. Therefore, if you desire a diversified portfolio with prospects of windfall income, high risk debt may be the best issues to invest in.

 

 


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