High-Yield Bonds.

In plain English

High-yield bonds are bonds from issuers with credit ratings below investment grade, meaning rating agencies see a higher chance the borrower could default. To attract buyers despite that risk, these bonds pay higher interest than safer bonds. They are also called junk bonds, and they tend to fall harder than safe bonds when the economy weakens. The extra interest is the reward you are paid for taking on that extra default risk.

01Why it matters

High-yield bonds can boost the income from your portfolio, but they can also lose a chunk of value fast in a downturn, so the higher payout comes with a real chance of loss you need to size correctly.

02The math, step by step

Picture a safe government bond paying 4 percent and a high-yield corporate bond paying 8 percent. The extra 4 percentage points is your compensation for risk. If you put 10,000 dollars in the high-yield bond, you would collect about 800 dollars a year in interest instead of 400 dollars. But if that company hits trouble, the bond's price could drop sharply, and in a default you might recover only part of your 10,000 dollars.

03What this is NOT

04Receipts

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