High yield bond fund
A high yield bond fund is a corporate bond fund that invests in bonds that are less than investment grade. Subinvestment grade bonds are often called junk bonds. Hence, the funds are sometimes referred to as junk bond funds.
As implied by the name, high yield bond funds pay higher yield than corporate bond funds. They do that by investing in higher risk, lower rated bonds. Professional managment and diversification are major advantages of such funds. However, the higher risk makes them most suitable as part of a diversified portfolio. High yield investments are not suitable for major portions of your retirement funds.
Junk bonds are noted for the high yield they pay, but that also tends to make their market value volatile. Their value changes with interest rates, but they respond more sharply to bad news in that in a crisis investors tend to sell their more risky investments and move their funds to safer investments. This is phenominon is often called a flight to quality.
Those considering high yield bond funds should also consider tax-free bond funds. Those in higher marginal tax brackets often find that the after tax yield of a high yield bond fund is equivalent to that of a higher quality tax-free bond fund. Hence, in a taxable account you can get the same after tax yield for less risk in a tax-free bond fund.
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