Say "bonds" and most investors picture sleepy government-issued Treasuries or municipal bonds -- safe but low return. But experienced investors know that corporate bonds, even junk bonds, can be very high yield fixed income instruments and quite liquid.
Depending on your investment strategy, a good selection of corporate bonds can turn a conservative portfolio into a strong performer without dramatically increasing risk. High yield bonds, and especially junk bonds, require professional advice before investing. But key to beginning that conversation is first understanding corporate bonds and high yield bonds of all types.
In this guide to high yield fixed income and corporate bonds, you'll learn:
1. Differentiating types of corporate bonds.
2. How to buy, track and trade high yield bonds.
3. High yield bonds, high-yield fixed income and so-called "junk" bonds.
4. How to measure risk when buying high yield bonds.
Choosing from types of corporate bondsWhen governments large and small anywhere in the world need money, they can tax or borrow. If they borrow, it's a bond, which is paid back with interest. Since it's government and generally safe, the interest paid is low, even zero when adjusted for inflation (although government bonds are normally tax exempt). Corporate bonds, however, are loans by investors to companies. Here, depending on the company's financial history, interest paid is higher, even competitive at times with stock market returns.
Buying and selling corporate bonds and high-yield debtMost of us won't buy individual corporate bonds, instead investing in a mutual fund that buys bonds or as part of a so-called "targeted fund" investment that includes an increasing portion of less-risky corporate and government bonds as the investment target date nears. However, one can buy and sell bonds like any stock in a normal brokerage account.
Want more risk and return? Corporate bonds can do thatEven a few decades ago, corporate bonds were a pretty sleepy investment. Then Wall Street took companies down on their luck, rechristened their high yield fixed income instruments "junk bonds" and made a killing selling high yield bonds debt to a market hungry for something new. Junk bonds are out. They now call junk bonds "high yield bonds" or "high yield fixed income."
Track your risk when investing in corporate bondsThe upside of corporate bonds and high-yield fixed income like high yield bonds is better returns. The downside, of course, is the potential for a given corporation to go under, making those corporate bonds worthless paper.
- If your goal is income or cash preservation, government bonds are lower risk. Buy high yield fixed income bonds only if you can withstand some losses.
- Double-digit returns for long periods is virtually impossible. Take any such claim about high yield bonds with a big grain of salt.
- As with stocks, blue chip corporate bonds pay less but tend to be safer, while junk bonds sold by companies in turnaround mode offer risk, but greater reward.