High-Yield Bonds, also known as junk bonds, are corporate bonds that offer higher interest rates than investment-grade bonds due to their higher risk of default. These bonds are typically issued by companies with lower credit ratings, as assessed by agencies like Moodyís, S&P, or Fitch, usually below a ìBBB-î rating. Despite the increased risk, they attract investors seeking potentially greater returns.

The main appeal of high-yield bonds lies in their ability to deliver better income, especially in low-interest-rate environments. Companies issue these bonds to raise capital for expansion, acquisitions, or restructuring when traditional financing options are limited or more expensive. In return, investors are compensated with higher yields to offset the elevated credit and default risks.

However, the increased returns come with potential downsides. These bonds are more vulnerable to economic downturns, as weaker companies may struggle to meet interest or principal payments. As a result, the default risk in high-yield bonds is significantly higher than in government or investment-grade bonds. Moreover, their prices can fluctuate sharply with changes in market sentiment, interest rates, or credit ratings.

Investors often manage this risk through diversification, either by purchasing a basket of high-yield bonds or investing through mutual funds and exchange-traded funds (ETFs) that specialize in this asset class. Such diversification helps spread credit exposure across multiple issuers and sectors.

From a portfolio perspective, high-yield bonds can enhance overall returns but should be balanced carefully against lower-risk investments. They are best suited for investors with moderate to high risk tolerance and a long-term investment horizon. Evaluating the issuerís financial health, industry outlook, and prevailing economic conditions is crucial before investing.

In essence, high-yield bonds represent a trade-off between higher potential returns and increased credit risk, making them a key component in diversified, return-seeking investment strategies when managed prudently.