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What Individual Investors Should Know About High-Yield Bonds

Posted: Feb 16, 2016 | Posted in:

As an individual investor, high-yield bonds certainly sound tempting. A higher interest rate without the ups and downs of the stock market — who doesn’t want that?

However, as with most investments, there is more to high-yield bonds than meets the eye. For individual investors, these can be extremely risky investments that can lead to sudden and unexpected losses. Managing high-yield bond investments requires in-depth knowledge and careful attention to the market and even highly-experienced bond fund managers can see their funds collapse in the blink of an eye.

What is a High-Yield Bond?

A high-yield bond is a type of investment that involves loaning money to a corporation. In exchange for the loan, the corporation promises to pay interest to the investor. Since corporate bonds are more risky than Treasury and municipal bonds, corporate borrowers must pay higher rates of interest.

However, even within the world of corporate bonds, there are different levels of risk. This is because some companies are more financially-sound than others. Companies like Moody’s, Standard & Poor’s (S&P) and Fitch Group rate corporations based on their financial condition, and these ratings are used to assess the relative risk of corporate bonds. The lower the rating, the higher the risk (and the higher the yield).

Due to the risks involved with high-yield bonds, they are also commonly known as non-investment-grade bonds, speculative-grade bonds or junk bonds.

What are the Risks Associated with High-Yield Bonds?

The risks associated with high-yield bonds primarily relate to the lack of creditworthiness of the companies accepting the loans. These companies are typically:

  • Poorly-rated by the rating agencies
  • Highly-leveraged (meaning that they have significant amounts of debt)
  • Struggling financially, and possibly even at risk of going out of business

All of this means that high-yield bond companies are at greater risk for defaulting on investors’ loans. The high-yield bond market is highly volatile, and investors who aren’t prepared can face huge swings that often end in major losses.

In addition, the high-yield bond market is plagued by scams. The Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and others regularly warn of high-yield scams that all too often cost unsuspecting investors their entire life’s savings. Recently, scam artists have been targeting victims through the Internet and social media, though phone, mail and in-person scams remain prevalent as well.

How Can I Recover Losses from a High-Yield Bond?

From mismanagement of high-yield bond funds to junk bond scams, individual investors who lose money in high-yield investment opportunities often have strong grounds to seek financial compensation for their losses. At Zamansky LLC, we regularly represent individuals who have lost money investing in high-yield bonds. We are actively investigating more than a dozen high-yield bond funds for possible improprieties.

If you have suffered losses in a bond scam or high-yield bond investment, we urge you to contact us immediately to discuss your case.

Speak with a High-Yield Bond Lawyer at Zamansky LLC Today

Located in the heart of Wall Street, Zamansky LLC represents individual investors in high-yield bond lawsuits and arbitration proceedings nationwide. To find out if you may be entitled to recover your losses, call (212) 742-1414 or contact us online for a free consultation today.