High- or low-yield Bond, where should you invest? If you are in such a dilemma, you are not alone. Believe it or not, it confuses even seasoned Bond investors. Although not as dynamic as Stocks and Equities, Bonds have peculiarities that can prompt contemplation. For instance, high-yield Bonds are exciting in terms of returns. But they may be risky.
Low-yield Bonds have higher ratings and reliability. However, they may not yield as much. Different types of Bonds, including Corporate Bonds, exist in the market. Here are the key differences between high and low-yield Bonds:
Definition
High-yield Bonds are fixed-income securities issued by companies with credit ratings lower than investment-grade Bonds. Also known as Junk Bonds, their low credit ratings make them high-risk investments. They offer higher yields, which compensate for the increased default risks of the issuer’s lower credit quality, which stems from unstable cash flows, high debt levels, or a poor credit record.
Low-yield Bonds offer a low interest or return rate. Companies issue them with a higher rating. They also carry lower default risk and prove a prudent choice for investors looking for less risky avenues and low yet stable income.
Yield and investment risks
The yield of high-yield Bonds is higher than low-yield Bonds. The investment risk is higher for high-yield Bonds as the company offers a high yield to compensate for the low ratings and high default risk. Conversely, the investment risk is lower for low-yield Bonds as entities issue them with a higher credit rating and lower default risk.
Target investors
High-yield Bonds are suitable for investors seeking to take on risk and potentially earn higher returns. Meanwhile, low-yield Bonds are the best choice for investors looking for more stability and safety than high returns.
Liquidity and value sensitivity
Investment-grade Bonds are more liquid than high-yield Bonds. Low-yield Bonds are more liquid due to higher demand and the issuer’s stability. The value sensitivity of high-yield Bonds to interest rate changes and economic environments is higher than low-yield Bonds.
Issuers
Small or medium-sized companies issue high-yield Bonds, whereas larger or more established companies issue low-yield Bonds. Secured and Tax-free Bonds are examples of high-yield Bonds, while Treasury Bills and Sovereign Gold Bonds are low-yield Bonds in India.
Coupon payments
High-yield Bonds usually offer higher coupon payments to investors to compensate for the increased risk. Low-yield Bonds, such as the Sovereign Gold Bond scheme, offer lower coupon payments because of the lower risk involved.
Conclusion
Your Bond yield depends upon your financial objectives and how much you are prepared to take the risk. For instance, if you are an investor seeking high returns and have a substantial corpus to offset the risk, you may consider investing in a high-yield Bond and potentially earn higher returns over a specified period. However, you may choose low-yield Bonds if you want a stable income, even if they have a relatively low yield.