What are High Yield Bonds?
High yield bonds, also known as junk bonds, are debt securities issued by companies with lower credit ratings. These bonds offer higher yields or interest rates in comparison to investment-grade bonds because they carry a higher risk of default. Investors who are willing to take on higher risks may be attracted to high yield bonds as they offer the potential for higher returns.
What are Fixed Income Bonds?
Fixed income bonds are debt securities issued by governments, municipalities, or corporations with higher credit ratings. These bonds pay a fixed interest rate over a predetermined period, providing a predictable stream of income to bondholders. Investors who prioritize stability and regular income often prefer fixed income bonds.
Key Differences between High Yield Bonds and Fixed Income Bonds
1. Credit Risk: High yield bonds are riskier than fixed income bonds due to the lower credit ratings of the companies issuing them. Fixed income bonds, on the other hand, come with lower credit risk as they are issued by entities with higher credit ratings. 2. Yield: High yield bonds offer higher yields or interest rates compared to fixed income bonds. This higher yield compensates investors for taking on the additional credit risk. 3. Income Stability: Fixed income bonds provide a more stable and predictable stream of income as they pay a fixed interest rate over a predetermined period. High yield bonds may have variable interest payments and are more susceptible to default. 4. Investment Objectives: Investors who are looking for potentially higher returns and are comfortable with higher risk may be inclined towards high yield bonds. Fixed income bonds are suitable for investors who prioritize stability, reliable income, and lower risk.