Question

What's the role of high yield bonds in the bond market.

Answer 1

High yield bonds are bonds that offer a higher yield due to the higher risk of default. The bonds are issued by companies who have credit ratings below BBB. Investors invest in these bonds, by getting attracted to the higher coupon rate it offers in comparison to the government bonds and the high quality corporate bonds. , although the risk involved in these bonds are also very high. Such bonds can provide high returns if included in the portfolio, in case the scenario in the economy improves or the company issuing these bonds show an improvement in performance the situation cab also get worsened of the company performs poorly.

An allocation to the high yield bonds provides diversification benefits in the portfolio due to the low correlation of these bonds with the rest of the securities issued in the fixed income market. They provide similar returns to the equity markets but with lower volatility.