The term junk bond makes people think of a worthless investment. Though there may have been a time over 30 years ago when this name had rightfully been earned, the reality today is that the term simply refers to bonds issued by less than investment-grade businesses. These bonds are often called high-yield corporate bonds. Unlike the name “junk bond” suggests, some of these bonds are an excellent option for investors. Just because a bond issuer is currently rated at lower than investment-grade, that doesn’t mean the bond will fail. In fact, in many, many cases, high-yield corporate bonds do not fail at all and pay back much higher returns than their investment-grade counterparts. Show Another important point is that even though these bonds are considered riskier than other bonds, they still are more stable (less volatile) than the stock market, so they offer a sort of middle ground between the traditionally higher-payout, higher-risk stock market, and the more stable lower-payout, lower-risk bond market. Ultimately, no stock or bond is guaranteed to reap returns and in the grand scheme of investment opportunities, junk bonds are by no means the riskiest option out there. Still, given they are riskier than traditional bonds, many junk bonds should be avoided based upon the specific circumstances of the company issuing them. Shrewd investors, therefore, investigate the bonds and weigh the pros and cons of each issuer against each other to determine whether or not a particular high-yield corporate bond is a wise investment. Junk BondThe AdvantagesThere are several features of high-yield corporate bonds that can make them attractive to investors:
Keep in mind that many of the companies out there issuing these bonds are good, solid, reputable companies who have just fallen on hard times because of a bad season, compounding mistakes, or other hardships. These things can make a company’s debt obligations skyrocket and drop its rating. Carefully researching the market, industry, and company can help reveal if the company is just going through a hard time, or if they are headed towards default. Shrewd bond investors regularly look at high-yield bond investment opportunities to help increase the yield on their fixed-income portfolio with great success. This is because such high-yield bonds provide a larger consistent ROI than government-issued bonds, investment grade bonds, or CDs. Stock investors also often turn to high-yield corporate bonds to fill out their portfolios as well. This is because such bonds are less vulnerable to fluctuations in interest rates, so they diversify, reduce the overall risk, and increase the stability of such high-yield investment portfolios. The Cons of High-Yield Corporate BondsThere are several negative aspects of high-yield corporate bonds that investors must consider as well to make a shrewd investment:
The Bottom LineYes, high-yield corporate bonds are more volatile and, therefore, riskier than investment-grade and government-issued bonds. However, these securities can also provide significant advantages when analyzed in-depth. It all comes down to money. Simply put, because certain issuers do not have an investment-grade rating, they must offer higher ROIs, and therefore, it clearly depends on the investors' risk profiles. Should I buy bond funds when interest rates are rising?Higher interest rates cause some short-term pain for bond investors, but the long-term impact is incredibly positive. As such, rising interest rates are a net positive for bond funds, and these are materially stronger investment opportunities today than before interest rates rose.
What bonds do well in a rising interest rate environment?Short-term bonds: Rising interest rates make prices of bonds go down. But the longer the maturity, the further prices will fall. And the opposite is also true: Bonds of shorter maturities do better than those with longer maturities when interest rates are rising because of their prices.
Are bonds a good investment in a rising rate environment?Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
What happens to bond funds in a rising rate environment?In the short run, rising interest rates may negatively affect the value of a bond portfolio. However, over the long run, rising interest rates can actually increase a bond portfolio's overall return. This is because money from maturing bonds can be reinvested into new bonds with higher yields.
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