What Is High Yield Interest?
High yield interest is an above-market rate of interest intended to compensate investors for the increased financial risk to their investment. High yield interest is paid by bonds that are also known as "junk" bonds.
Other People Are Reading
-
Bond
-
A bond is a promise by a government or corporation to repay money that they have borrowed from investors. In addition to repayment of principal, borrowers must also pay interest on the bond.
Bond Ratings
-
Most bonds have their financial strength rated by an outside agency, such as Standard and Poor's. Ratings range from AAA (excellent) to D (in default). The top four bond ratings, AAA, AA, A and BBB, are considered "investment grade" ratings.
-
High Yield Bonds
-
High yield or "junk" bonds are rated below investment grade. High yield bonds receive lower ratings due to the weak financial performance of the underlying company.
Risk
-
High yield bonds are more likely to default due to the financial condition of the issuer. In the event of a bond default, a bond investor may lose the entire value of their investment including any interest.
High Yield Interest
-
As investors face a higher risk of default, companies issuing high yield bonds must pay a higher rate of interest to compel investors to purchase the bonds.
-
References
- Photo Credit investment image by Kit Wai Chan from Fotolia.com
