Complex Financial Products: High-Yield Bonds

 

Inexperienced investors often hear “bonds” and immediately think “safe” or “conservative” investment. But are all bonds safe and conservative? No. In fact, some high-yield bonds - often called “junk bonds” - are among the riskiest investments in the marketplace.

Investment Bond Basics

Investors who decide which bonds to buy based solely on a bond’s yield are “reaching for yield,” one of the most common mistakes bond investors make. Alternatively, if your broker has placed you in junk bonds, it may be his or her mistake that is the issue.
— FINRA

Remember, bond prices are tied to the interest rate. When interest rates drop, bond price go up; when interest rates go up, bond prices drop. The risk involved in purchasing a bond is often referred to as “interest rate risk” or “market risk,” and it increases the longer you hold a bond. Think about it. Interest rates tend to be very stable in the short term; but in the longer term - years or decades from now, anything can happen.

What are High-Yield Bonds?

 

Put simply, high-yield bonds are investment products that offer higher than usual rates of return in exchange for elevated risk. The elevated risk comes from the heightened threat that the bond’s issuer - whether it’s a private company or a national government - may default.

Bonds can generally be separated into two categories: investment grade and non-investment grade. The rating system that classifies bonds tell us that bonds BBB, bbb, or Baa or higher are investment-grade. Non-investment grade bonds, on the other hand, are rated BB, bb, Ba, or lower. Non-investment grade bonds are also known as high-yield or junk bonds, and they contain a high level of default risk.

According to FINRA, the securities industry’s watchdog:  Investors who decide which bonds to buy based solely on a bond's yield are "reaching for yield," one of the most common mistakes bond investors make. Alternatively, if your broker has placed you in junk bonds, it may be his or her mistake that is the issue.

Brokers Must Match Investors to Investments

As you may know, it is not the duty of retail investors to fully understand the complex products contained in their portfolios. Financial advisors, on the other hand, must not only understand the product he or she is selling, but he or she must also ensure there is a clear suitability match between investor and the investments. High-yield bonds are not for everyone, and they typically only appear sparingly in a normal portfolio. Otherwise, the portfolio may contain excessive risk.

Pennsylvania & New Jersey Securities Litigation Law Firm

 

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If you or someone you know has suffered financial loss due to high-yield bonds or any other form of investment fraud or broker misconduct, please contact our experienced team of securities attorneys immediately to protect your legal rights by calling 1-855-462-3330 or by using our online contact form.