Risk Considerations of High Yield Bonds

• Default risk: Defaults occur when a company fails to make an interest or principal payment to a debt holder as scheduled and as specified in the legal agreements. The risk of default on principal or interest, or both, is greater for high-yield bonds than for investment-grade bonds.
• Default risk extremes: Default risks vary across the high yield segment. A study from Moody’s showed how Corporate bonds rated Ba, just inside the high yield category, had a 1.1% probability of defaulting within a year; whereas more speculative bonds, rated Caa-C, had a one-year default probability of over 16%*. Investment grade bonds had under 0.5% probability of a default within a year.*
• Call risk: Many corporate bonds are callable and have a predetermined call schedule. Callable bonds can be redeemed or paid off at the issuer’s discretion prior to the bonds’ maturity date. Typically an issuing corporation will call its bonds when interest rates fall, leaving the investor with less favorable reinvestment possibilities. Investors may suffer capital loss and lower yields as a result of their bond being called by the issuer. When evaluating high yield corporate bonds, an investor should know whether call options exist and when they may be exercised.
• Make-whole calls: Some new issues have the option to call the bond as interest rates decline. Issuers may call these bonds at par plus a premium. This feature is referred to as a make-whole call. The amount of the premium is derived from the yield of a comparable Treasury security plus additional basis points. Because the cost to the issuer can often be significant, make whole calls are not frequently invoked.
• Credit risk: Corporate bonds are subject to credit risk; however these risks can be reduced by investing in higher rated securities and/or by building a diversified portfolio. Bonds with lower credit ratings are more likely to be in danger of default. If a bond issuer fails to make either a coupon or principal payment on its bonds as they come due, or fails to meet some other provision of the bond indenture, it is said to be in default.
• Event risk: A corporate bond’s payments are dependent on the company’s ability to finance its debt. Unforeseen events could impact the issuer’s ability to meet their financial commitments.
• Business cycle risk: Because high yield issuers typically have riskier business strategies and balance sheets reflecting greater leverage, they are at greater risk from a general downturn in business conditions.

Corporate Note Risk Report Card ¹

	Credit and default risk: Varies significantly from bond to bond and is sometimes hard to determine
	Liquidity risk: Many corporate notes are illiquid, making it hard to find a buyer if you need to sell your bond.
	Interest rate risk: If interest rates rise, the value of a corporate bond on the secondary market will likely fall.
	Event risk: Mergers, acquisitions and other tumultuous events can have a negative impact on a bond issuer's ability to pay its creditors

¹Source: finra.org

Please consult your financial advisor and relevant offering documents prior to investing any money in these or other products, and for information and additional risks (see above) associated with High Yield Corporate Notes, including but not limited to, call risk, principal risk, credit risk and interest rate risk. These products are offered through many but not all broker-dealers. 

This information does not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any sale of those securities, in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful.  Product suitability must be determined for each individual investor.