Investor BulletIn

What Are High-yield 

Corporate Bonds?

The SEC’s Office of Investor Education and Advocacy is 

issuing this Investor Bulletin to educate individual investors 

about high-yield corporate bonds, also called “junk bonds.” 

While they generally offer a higher yield than investment-grade

bonds, high-yield bonds also carry a higher risk of default.

What is a high-yield corporate bond?

A high-yield corporate bond is a type of corporate bond

that offers a higher rate of interest because of its higher 

risk of default. When companies with a greater estimated 

default risk issue bonds, they may be unable to obtain 

an investment-grade bond credit rating. As a result, they 

typically issue bonds with higher interest rates in order to 

entice investors and compensate them for this higher risk. 

High-yield bond issuers may be companies characterized 

as highly leveraged or those experiencing financial 

difficulties.  smaller or emerging companies may also 

have to issue high-yield bonds to offset unproven operating

histories or because their financial plans may be considered

speculative or risky.

What are some key risks in high-yield 

corporate bonds?

some investors with a greater risk tolerance may find 

high-yield corporate bonds attractive, particularly in low 

interest rate environments. If you are considering buying 

a high-yield bond, it is important that you understand 

the risks involved. 

Default risk. Also referred to as credit risk, this is the 

risk that a company will fail to make timely interest or 

principal payments and default on its bond. Defaults also 

can occur if the company fails to meet certain terms of its 

debt agreement. Because high-yield bonds are typically 

issued by companies with higher risks of default, this risk 

is particularly important to consider when investing in 

high-yield bonds.

Interest rate risk. Market interest rates have a major 

impact on bond investments. The price of a bond moves 

in the opposite direction than market interest rates—like 

opposing ends of a seesaw. This presents investors with 

interest rate risk, which is common to all bonds. In 

addition, the longer the bond’s maturity, the more time 

there is for rates to change and, as a result, affect the 

price of the bond. Therefore, bonds with longer maturities

generally present greater interest rate risk than bonds of 

similar credit quality that have shorter maturities. 

Economic risk. If the economy falters, some investors 

are likely to try to sell their bonds. In what is known as 

a “flight to quality,” a number of investors may decide 

to replace their riskier high-yield bonds with safer ones, 

such as u.s. treasury bonds. If there are more sellers 

Investor Assistance (800) 732-0330 www.investor.gov
than buyers for high-yield bonds, the supply will exceed 

demand and prices of the bonds will fall. In addition, 

some companies that issue high-yield bonds may be less 

able to weather challenging economic circumstances, 

increasing the risk of default.

Liquidity risk. liquidity is the ability to sell an asset, 

such as a bond, for cash when the owner chooses. Bonds 

that are traded frequently and at high volumes may have 

stronger liquidity than bonds that trade less frequently. 

liquidity risk is the risk that investors seeking to sell 

their bonds may not receive a price that reflects the true 

value of the bonds (based on the bond’s interest rate and 

creditworthiness of the company). High-yield bonds 

may be subject to more liquidity risk than, for example, 

investment-grade bonds. 

How can you invest in high-yield 

corporate bonds?

You can invest directly in high-yield corporate bonds 

by buying them from broker-dealers. Alternatively, you 

can invest in these high-yield bonds indirectly by buying 

shares in mutual funds or exchange-traded funds (etFs)

with a high-yield bond focus. These mutual funds and 

etFs have portfolios that contain high-yield bonds. The 

investment adviser of the mutual fund or etF selects the 

high-yield bonds for the portfolio.

n 

Special Note for Owners of High-Yield 

Bond Mutual Funds or ETFs

Investors in high-yield bond mutual funds or 

etFs are not immune from liquidity and other 

risks. If many bond fund investors cash out their 

shares at the same time, the fund may need to sell 

assets to raise cash to pay for the redemptions. 

This may force the fund to sell bonds at a loss, 

causing the fund’s share price to fall.

What should I research before investing?

While useful information may be found in a variety of 

secondary sources, you should be sure to read primary 

offering documents, such as the prospectus. A prospectus

is an offering document filed with the seC by a company, 

mutual fund, or etF when it registers securities it intends

to sell to the public. 

Among other things, the prospectus for a corporate bond

offering describes the offering, the financial condition of 

the company issuing the bond, how the company plans 

to use the proceeds from the sale of the bonds, the terms 

of the bond, and the significant risks of investing in it. 

Prospectuses for registered corporate bond offerings are 

available to the public without charge on the seC’s 

eDGAr website, available at www.sec.gov/edgar/

searchedgar/webusers.htm. 

Be sure to understand the terms of the offering, which 

could include any of the following:

Covenant protections. Covenants are terms 

designed to protect bondholders by restricting the 

company from taking actions that could negatively 

affect its ability to pay principal and interest. 

Covenants can also protect the bondholders’ claim of 

priority over other creditors. For example, covenants 

could restrict the company’s ability to pay shareholder dividends or limit it from taking on more 

debt. Covenant protections are often more extensive, 

and may take on greater importance, for high-yield 

bonds because they generally present a higher risk of 

default. nonetheless, when high-yield bonds are in 

strong demand, some companies may include fewer 

covenant protections. Investors should consider the 

additional risks of investing in “covenant-lite” bonds. 

You should not hesitate to ask your broker or other 

financial professional about the covenant protections 

of any bond you are considering purchasing.

Investor Assistance (800) 732-0330 www.investor.gov

2
n Payment terms. some bonds may allow the issuer 

to skip an interest payment under certain conditions. 

The terms also may allow payment-in-kind, or PIK, 

which means that an interest payment may come in 

the form of additional bonds rather than cash. Before 

purchasing a bond, investors should make sure they 

understand and are comfortable with the terms of 

payment. similarly, investors in a high-yield bond 

mutual fund or etF should understand whether 

the fund or etF may invest in bonds with such 

payment terms.

n Call provisions. These provisions allow the company

to “call” the debt or, in other words, repay the bond 

in full before it matures. The bond terms will specify 

whether and when the company may call the bond. 

For example, a bond with a 10-year maturity may 

have call protection for the first five years, during 

which the company cannot call the bond. But the 

company could call the bond any time in the final 

five years. If the bond is called during the period 

after the call protection has elapsed, investors will 

receive their principal back, but may be unable to 

reinvest it at a similar rate of interest. Before investing 

in a bond, investors should understand the call terms 

along with any other provisions that could result in 

early payment. 

Bond fund prospectuses. If you are investing in 

a high-yield bond-focused mutual fund or etF, 

these funds also prepare prospectuses detailing 

important information about the fund. In addition 

to eDGAr, you can also find a bond fund’s 

prospectus at the bond fund’s website.

Conclusion

You should base your decision to invest in high-yield 

bonds on your individual circumstances, including 

your income and net worth, investment objectives, risk 

tolerance, time horizon and other security holdings. In 

addition, you should have a good understanding of both 

the potential rewards and the risks involved.

Investor Assistance (800) 732-0330 www.investor.gov

3
Additional Information

For our Investor Bulletin on corporate bonds, visit 

sec.gov/investor/alerts/ib_corporatebonds.pdf.

For more information on mutual funds generally, visit

sec.gov/investor/pubs/beginmutual.htm. 

For our Investor Bulletin on etFs, visit sec.gov/

investor/alerts/etfs.pdf. 

For “using eDGAr - researching Public Companies,” visit www.investor.gov/researching-managinginvestments/researching-investments/using-edgarresearching-public-companies.

For more information about high-yield bonds, see 

FInrA’s The Grass Isn’t Always Greener–Chasing

return in a Challenging Investment environment 

at www.finra.org/Investors/ProtectYourself/Investor

Alerts/tradingsecurities/P123947.

For more information about bonds in general, visit 

FInrA’s smart Bond Investing at www.finra.org/

Investors/InvestmentChoices/Bonds/smartBond

Investing/Introduction/. 

For more information about credit rating agencies, 

visit our Fast Answer at sec.gov/answers/nrsro.htm

and the website for the seC’s office of Credit ratings

at sec.gov/about/offices/ocr.shtml. 

For more information about municipal bonds, see 

our Investor Bulletin on municipal bonds at sec.gov/

investor/alerts/municipalbondsbulletin.pdf, and 

visit the Municipal securities rulemaking Board’s 

electronic Municipal Market Access (eMMA) 

website at www.emma.msrb.org. 

For educational information, visit the seC’s website 

for individual investors at www.investor.gov.

The Office of Investor Education and Advocacy has provided this information as a service to investors. 

It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the 

meaning or application of a particular law or rule, please consult with an attorney who specializes in 

securities law.

SEC Pub. No. 150 (6/13)