What are High-Yield-Bonds?
Definition: High-Yield-Bonds are bonds issued by debtors with a lower credit-quality. The bondrating is not in the safe investment-grade range, but in the rather speculative high-yield range. These debtors have a higher debt level and/or lower earning power. Investors are getting a higher interest-yield, which compensates the higher default-risk of high-yield-bonds. High-Yield-Bonds are also known as "Junk-Bonds", because of the low credit-quality, referring to junk (trash).
The High-Yield Bond-Market
High-Yield-Bonds enjoy a growing popularity among investors because of the high interest they offer. In order to benefit from this higher yield, and also minimizing the default-risk at the same time, private investors should invest in different bonds to diversify the risk. This can easily be done with a High-Yield-Bond-Fund. They offer a broad diversification and risk control through a professional manager.
The risk involved in these speculative bond-market is significant and comparable to the equity market. If the repayment of a bond is at risk, the market-price will drop to 50% ore even below; but will go all the way back to 100% if the repayment comes. During the lifetime of a bond, the liquidity can be very bad and you might not be able to sell your bond.
For the valuation of high-yield-bonds, investors are looking at the pick-up these bonds pay compared to a risk-free-investment. This pick-up is known as Spread. The spread is normally between +3 and +5% but can also change to +5 to +10% in a recession, when the default-risk and the uncertainty increases. A change in the spreads will always lead to a price-change of the bond: if the spreads go higher, the bond goes lower.
If a bond is in default, the price of the bond will only be a fraction of its nominal value. Specialized Investors trade with these papers. These papers are known as distressed debt.
A selection of high-yield-debtors
They had rating below investment-grade at 2012-08-14:
- Royal Caribbean Cruises