Which type of investment is characterized as high-risk, with potential for high returns?

High-yield bonds are characterized as high-risk investments with the potential for high returns due to the fact that they are issued by companies or entities with lower credit ratings. This means there is a greater chance of default compared to investment-grade bonds. Consequently, to compensate investors for taking on this additional risk, high-yield bonds typically offer higher interest rates than safer investment options. The promise of greater returns attracts investors willing to accept the risk, which ties directly into the nature of these investments.

In contrast, savings accounts are low-risk and typically generate very modest returns. Investment-grade bonds, while safe and reliable, do not offer the same high-return potential as high-yield bonds. Index funds are generally more stable and aim for market-average returns, which do not embody the high-risk, high-reward dynamic that defines high-yield bonds. This differentiates high-yield bonds as a distinct class of investment aimed at those seeking substantial returns in exchange for higher risk exposure.