Choosing Between Junk or High-Yield Bonds

Bonds are issued by private and public entities that need long- and short-term financing. Bonds come in a large variety, with different terms, interest rates, and issuers.

Junk or high-yield bonds offer a high rate of return but are considered a risky investment instrument. High-yield bonds have a low credit rating and are assessed based on different factors such as industry or sector, financial holdings, and others. According to some finance experts, junk bonds are a valuable instrument because they supply capital to start-ups and struggling companies. There are other types of bonds such as book entry, build America, convertible, and others. Some people invest in zero-coupon bonds to supplement their income. War bonds are another variety and are issued by national governments that seek to fund wars. Government agencies, financial institutions, and corporations also issue foreign currency bonds that are denominated in other currencies. Other investment products include perpetual and covered bonds and asset-backed securities. Perpetual bonds are different from other instruments in that they have no maturity. While perpetual bonds offer a steady stream of revenue, treasury bonds are the safest investment instrument. There are also mortgage-backed and asset-backed securities as well as collateralized debt and mortgage obligations .

Investors can choose from different types of products such as bearer, lottery, municipal, and treasury bonds. They are a safe investment instrument offered by local governments. Some bonds are insured while others are not, but all of them are tax-free. Municipal bonds come with a lower interest rate than certificates of deposits and treasury bills. This is a type of long-term security that comes with a floating or fixed interest rate. Zero coupon bonds are one option for prudent investors. Bonds are a preferred investment instrument of those who are looking for steady flow of retirement income. Individuals with short-term savings goals usually choose other, riskier investments. Issues that are insured are practically risk-free. Bonds are in the form of low-interest loans that come with transaction fees of 0.5 to 3 percent. The main problem is that municipal bonds offer lower returns than stocks.

Sovereign states also offer products in foreign currencies. Foreign currency bonds have nicknames such as Samurai and Yankee. Bonds can be divided into fixed rate and floating rate instruments. Products differ when it comes to yield-to-call, credit quality, and other parameters. Issuers offer products with different market price, principal, put and call dates, etc. Those who seek to invest their money over a short period usually opt for fixed rate bonds with a term of 1 year.

References: 

Canada Banks

Bloomberg