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High yield bond funds take higher risks with the goal of paying higher yields by investing primarily in securities that are either not rated, or have been rated below investment grade by the major ratings agencies—for taxable funds, BB and below.
For many different reasons, the entities issuing high yield bonds are at greater risk of missing payments or defaulting on the principal at maturity. Consequently, these bonds typically compensate investors for that risk with coupons that are generally higher than those offered by similar investment grade bonds.
|Taxable high yield||
Invest primarily in taxable bonds issued by non-investment grade companies or governments.
Invest primarily in floating rate loans issued by non-investment grade companies. Loans are typically senior to bonds on the balance sheets of those issuers, and their coupons typically float above a common short-term benchmark, such as the London Interbank Offered Rate (LIBOR).
|High yield municipal||
Primarily invest at least 50% of their assets in municipal securities that are either not rated or that have been given a non-investment grade rating by a major agency such as Standard & Poor's or Moody's, which is considered speculative for municipal securities.
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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
High yield/non-investment grade bonds involve greater price volatility and risk of default than investment grade bonds.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. A floating-rate loan might not be fully collateralized, which may cause the floating-rate loan to decline significantly in value.