Before we get into high-yield bonds, let’s talk about bonds in general. A bond is an interest bearing debt security. It’s like an IOU. The issuer pays you interest and returns your principal when either the bond matures or when the bond is “called.”

       Bonds are rated by credit rating agencies, like Moody’s or Standard & Poor’s to assess the creditworthiness of an issuer and the likelihood that it’ll repay debt. The highest rating is AAA, but anything rated BBB and above are considered quality; and anything BB or below is considered non-investment grade bonds, or “junk bonds.” These “junk bonds” are also known high-yield bonds.

       As expected, high-yield bonds pay higher yields. When you invest in high-yield bond funds, there’s greater risk. If you think about it, higher yields are paid to compensate for the risk associated with the investment. Additionally, investors who have a high risk tolerance and want to increase income and total returns might invest in high-yield bond funds, but most investors consider high-yield bonds best suited as part of a diversified portfolio.

       While working with your financial advisor, he or she will be able to advise you on which bonds best suit you. Your financial advisor will also let you know how much exposure to these types of investments you should have in your portfolio.