Bonds that are rated below investment grade are considered High yield bonds or junk bonds. These bonds (normally corporate bonds) will pay a higher yield or rate of return, in exchange for higher risk.
High Yield Bonds, Funds and Junk Bond Investments
High Yield Investments on fixed income vs. stock can provide steady high returns.
American Investment Training works with many great companies who specialize in high yield bonds and funds. Whether it's education or helping you learn how to trade or anything else related to the high yielding junk bond field.
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Bonds that are rated below "investment grade" level are considered speculative (or junk bonds) and thus give the investor a higher yield. There are many funds composed of investments in high yield corporate bonds.
A corporate bond is one issued by a corporation looking to raise capital for it's business or perhaps even to pay off or refinance existing bonds or debt. High yield funds will invest in these companies.
Ratings are issued mainly by Standard & Poor's, Moody's and Fitch. The general rule is the high the rating, the lower the yield on the bond. That is because higher quality in the bond world means lower risk and lower return. The one exception normally is a bond could have a higher rating than one with a lower rating if the bond has other risky features like a callable bond. A callable bond is one where the company can call the bond back early. This is usually done when interest rates are lower, so the company is effectively refinancing on YOU and now you must re-invest in another bond when yields are not as high as before. High Yield Bond funds who overly invest in callable bonds will have unsteady dividends because of these higher return bonds that are suddenly not there anymore.
How to evaluate Yield - High or low
Yield is everything. Some investors when looking for the highest return on bonds will look at the coupon rate or the nominal yield. A Bond could have a coupon rate of 9.00% but have a yield of 5.00% because the bond is selling at a premium. A high yield fund should have a balance of long term, short term, callable and non callable bonds in it's portfolio, but there are High Yield funds who will play or not play this balance of term protection and quality.
The term "junk bond" is really an old term that doesn't really mean JUNK!
I guess that's why people just say "high yield bonds" or "high yield bond funds" vs. Speculative - which is kind of boring I guess. So mutual funds, closed end funds, hedge funds all use the high yield fund term. It really doesn't matter but just know that with a higher rate of return on a fixed income investment or bond fund, the quality of the securities or stability (in credit rating, maturity length or call features) will be less stable. The risk of actual default is very low with debt and bonds.
Bond Funds with higher yields and dividends
When it comes to mutual funds or hedge funds, a high yielding fund will pay out regular dividends, because they are collecting a fixed interest rate on the bonds. Many funds will pay out healthy dividends when bonds are sold at a profit. Higher return funds will have to trade in and out of their bonds often to maintain the highest yield possible.
The best time to buy bonds or high yield funds is when interest rates are high - and you expect them to stay the same or fall.
When interest rates fall, existing bond prices go up because the coupon or nominal yield on a bond never changes. So the reverse is also true. As Interest rates rise, existing bond prices go down. A High yield bond fund's success largely depends on the fund managers timing and research. Bonds should also be bought with staggering maturities to protect interest rate risk for the fund manager or the bond investor. Of course if all you are looking for is going for the highest yield, then you will be concerned less about all of these other factors.
The highest yield funds will most likely contain some debt of foreign countries. But read the prospectus and see where and what the philosophy of the fund is. It won't list specific high yield investments, as they are being traded or moved all the time, but the mutual fund or hedge fund of junk bonds or any investment must disclose the "general philosophy", investments used and obviously fees - if there are any.
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