what are high yield bonds 
high yield bonds also called junk bonds are bonds that pay higher interest rates because they have lower credit ratings than investment grade bonds high yield bonds are more likely to default so they pay a higher yield than investment grade bonds to compensate investors 1issuers of high yield debt tend to be startup companies or capital intensive firms with high debt ratios however some high yield bonds are fallen angels which are bonds that lost their good credit ratings investopedia nono floresunderstanding high yield bondsa high yield bond or junk bond is a corporate bond that represents debt issued by a firm with the promise to pay interest and return the principal at maturity junk bonds are issued by companies with poorer credit quality bonds are characterized by their credit quality and fall into one of two bond categories investment grade and non investment grade non investment grade bonds or high yield bonds carry lower credit ratings from the leading credit agencies a bond is considered non investment grade if it has a rating below bb from standard poor s and fitch or ba1 or below from moody s bonds with ratings above these levels are considered investment grade credit ratings can be as low as d in default and most bonds with c ratings or lower carry a high risk of default 2high yield bonds are typically broken down into two subcategories advantages of high yield bondsinvestors choose high yield bonds for their potential for higher returns high yield bonds do provide higher yields than investment grade bonds if they do not default typically the bonds with the highest risks also have the highest yields modern portfolio theory states that investors must be compensated for higher risk with higher expected returns disadvantages of high yield bondswhile high yield bonds do offer the potential for more gains compared to investment grade bonds they also carry a number of risks like default risk higher volatility interest rate risk and liquidity risk default is itself the most significant risk for high yield bond investors the primary way of dealing with default risk is diversification but that limits strategies and increases fees for investors with investment grade bonds you can buy bonds issued by individual companies or governments and hold them directly when you hold individual bonds you can build bond ladders to reduce interest rate risk investors can often avoid the fees related to funds by holding individual bonds however the possibility of default makes individual bonds riskier than investing in bond funds small investors may want to avoid buying individual high yield bonds directly because of high default risk high yield bond exchange traded funds etfs and mutual funds are usually better choices for retail investors interested in this asset class because their diversity helps reduce risk historically high yield bond prices have been significantly more volatile than their investment grade counterparts the volatility of the high yield bond market is similar to the volatility of the stock market unlike the investment grade bond market which has much lower volatility all bonds face interest rate risk this is the risk that market interest rates will rise and cause the price of a bond to decrease the price of bonds move in the opposite direction of the price of market interest rates the longer a bond s term the higher the interest rate risk because there is more time for interest rates to change 4liquid assets are ones that you can sell easily for cash when bonds are traded frequently they have higher liquidity liquidity risk is the risk that you won t be able to sell an asset at the time and for the price that reflects the true value of the bonds high yield bonds generally have higher liquidity risk than investment grade bonds even high yield bond mutual funds and exchange traded funds etfs carry liquidity risk 4investment grade vs non investment gradeyou can typically classify bonds into investment grade and non investment grade bonds are rated by three major ratings agencies moody s standard poor s and fitch 