As they are famously called, junk bonds are bonds that pay higher interest rates as they have lower credit ratings as compared to investment-grade bonds. High-yield bonds are not as secure as investment-grade bonds, so they pay higher interest rates to compensate the investor. Such debt is usually undertaken by capital-intensive companies with high debt ratios or start-ups. Read on to know more about them.

Advantages of investing in high-yield bonds
Stock investors usually invest in high-yield corporate bonds to make their portfolios as these bonds are less vulnerable to fluctuating interest rates. This means they diversify, reduce the overall investment risk, and elevate the stability of high-yield investment portfolios. Here are a few advantages of buying high-yield bonds:

• High expected returns
  Though they are ironically called “junk bonds,” they provide higher returns as compared to investment-grade bonds. An example of this is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which garnered total annual returns of 6.44%. This feature works on the modern portfolio theory, wherein the investors are compensated for the high risk of investment.
• High yields
  High-yield bonds can provide at least 150 to 300 basis points more than what’s expected from investment-grade bonds. Mutual funds and Exchange Traded Funds (EFTs) are a way to tap into these bonds without the high risk of investing in a single company’s high-yield bonds.

Disadvantages of purchasing high-yield bonds
Along with the pros, high-yield corporate bonds have several negative aspects. You should consider these as well to make an informed decision when investing:

• Default risk
  High-yield bonds are subject to high risk and volatility; the easiest part of securing such high-yield bonds is through diversification, which is the only strategy to deal with the default risk of the investment. That said, it increases an investor’s expenses significantly. An important tip for small investors to keep this risk at bay is to avoid buying high-yield bonds. This is because they come with the chance of losing the entire investment. Instead, ETFs and mutual funds are suitable options for retail investors.
• High volatility
  The volatility of a high-yield bond can be compared to that of the stock market. Their prices are always more volatile than investment-grade bonds, which is why they offer higher returns to compensate for it.

Top high-yield bonds

• RBC BlueBay High Yield Bond
  The investment aims to reach a high level of total return, including income and capital appreciation. The company invests most of its assets in fixed-income securities issued by sub-investment grade companies internationally, with at least 70 percent in the company’s domiciled entities. The high-yield fund aims to generate excess returns based on high-quality, proprietary research.
• Federated Hermes High Yield Start Port
  This is a high-risk investment when compared to funds in the same category. That said, the performance of the funds has been noteworthy over the years. They have fetched over 10 percent returns in the past year and more than 7 percent over 3 years. The Federated Hermes High Yield Stat Port shows a consistent rise in returns, and the fund primarily invests in high-yield bonds, mutual funds, and fixed securities.
• Loomis Sayles High Income Opps Fund
  The fund has performed exceedingly well in the past years. It has returned more than 17 percent over the past year and above 7 percent over the past decade. This investment primarily aims at high current income by investing the assets into high-income securities, and the secondary objective is capital appreciations. Loomis Sayles High Income Opps Fund invests a significant portion of its assets in floating rate loans made to foreign borrowers.

Don’t forget to study the market before investing in high-yield bonds or approach someone who is knowledgeable about it if you are a first-timer.