What is a High-Yield Bond?
How Does a High-Yield Bond Work?
Prices of high-yield bonds tend to be more sensitive to changes in their issuers' financial outlooks than to changes in interest rates (they actually can act as a hedge against interest rate risk), but in general, when interest rates are lower, the difference in returns among of various credit ratings is larger. In other words, there is a bigger difference between what a Treasury bond might and what a high-yield might when interest rates are low. This difference (the credit spread) tends to decrease when rates are high. Thus, as interest rates fall the more attractive high-yield and are to investors.
Why Does a High-Yield Bond Matter?
As you can see, bond ratings have huge influence on the price and demand for certain . The lower the rating, the riskier the and the less the is worth. High-yield bonds often have less trading activity and thus liquidity problems. This is why downgrades (or rumors of downgrades) in an 's credit rating can have a significant impact on its and on the or industry.
High-yield income investors actively enhance their returns by dividing into sectors based on certain characteristics such as credit rating, , , , etc. and then finding those sectors that perform most favorably for the investor under certain conditions.are not always bad, however. They simply there is more risk associated with the and thus more potential for higher returns. In fact, many