High-yield bonds cannot be strictly categorized as a good or bad investment decision. Generally, a high-yield bond has a lower credit rating than investment-grade bonds, but they offer better returns. What investors must consider is that while investing in bonds with lower rating may have its risks, there is also a good potential of opportunity which can be leveraged. These bonds can prove a good investment if you know what to look for while investing.
High Yield Bonds are the bonds issued by entities that are below investment grade. Being below the investment grade doesn’t make them worthless. Generally, startup companies or new subsidiaries are considered below investment grade during the initial stage of their venture.
Here are some quick points for you to consider:
While choosing high-yield bonds, you need to do the due diligence thoroughly on your part. Choose companies that have shown a strong performance historically. Take a look at their balance sheet and profit and loss statements. You can take the help of your accountant friends or family who trade to get their inputs. Screener is a popular website where you can easily access the financial statements of all companies online. You can collect financial data from issuers’ websites. Annual reports published on the website provide financial data, management, and growth plans.
Secondly, do some research to understand their growth and investment plans for the future. You can go a step ahead to evaluate these plans and establish whether these companies would be at an advantage in the years ahead. Companies with strong growth plans is a showcase of confidence in the company by the leadership and management team. The investor has to think about issuers’ compliance and quality of management. Value-based companies sustain for a longer time in the market. Credit rating agencies consider multiple facets of the issuer while assigning rates so investors can consider credit ratings while making investment decisions.
Another factor to consider while investing in high-yield bonds is their past bond performance and repayment history. Companies that have consistently paid the returns in a timely manner will most likely continue to do so going forward as well. Also, you can consider whether the bonds are secured or unsecured. If there is surety then it is definitely an added advantage for the investor.
The last and most important factor to consider is your risk appetite, investment amount, and duration of the investment. Consider whether you will be able to invest the amount without hindering your other financial goals, and also keep the amount locked for the duration of the investment period.
The advantage of high-yield bonds is primarily their high-interest rates if you hold them till maturity. But if you want to sell it in the secondary market, the returns you get solely depend on the market performance of the company during that time.
This article is a simplification of the various factors that matter while investing in high-yield bonds. Like with any investment decision, a good investor must do their own research and evaluate objectively to ensure a good investment.