What is the risk associated with high-yield bonds?

High-yield bonds, often referred to as "junk bonds," are issued by companies or entities with lower credit ratings compared to investment-grade bonds. This lower credit quality means these bonds are perceived to carry a higher risk of default, which is the possibility that the issuer will fail to make interest payments or repay the principal at maturity. Investors in high-yield bonds demand higher yields as compensation for this increased risk.

The nature of high-yield bonds makes them attractive to certain investors looking for higher returns, but it is essential to recognize the inherent risk involved. This characteristic directly ties to the understanding that not all bonds are created equal, and the potential for substantial returns comes with the significant concern that the issuer may not meet its financial obligations. The understanding of bonds' risk and return profile is essential for anyone involved in consumer financial decisions or investments.