The AI (ChatGPT) Bond Investing Handbook: High-Yield Corporate Bonds

Here is the response from ChatGPT for the prompt corporate bonds high yield entered on February 19, 2023.

Corporate bonds that offer high yields are often referred to as "high-yield" or "junk" bonds. These bonds are issued by companies that are perceived to have a higher risk of defaulting on their debt obligations, and as a result, they must offer higher interest rates to attract investors.

Investors who are willing to take on this higher risk can potentially earn higher returns than they would with lower-risk bonds. However, it's important to note that high-yield bonds are generally not suitable for all investors, as they can be volatile and may not provide the same level of stability as investment-grade bonds.

If you're considering investing in high-yield corporate bonds, it's important to do your research and understand the risks involved. It's also a good idea to diversify your portfolio and not invest all your money in high-yield bonds. Consulting with a financial advisor can also be helpful in making informed investment decisions.

Example of High-Yield Corporate Bond

An example of a high-yield corporate bond is the 7.75% bonds due in 2026 issued by Hertz Global Holdings, a rental car company. These bonds were rated as "junk" by credit rating agencies due to the company's high level of debt and weak financial performance. However, investors were attracted to the high yield of these bonds, which offered a 7.75% annual interest rate, much higher than what they could earn on investment-grade bonds.

Despite the high yield, there was also a high risk of default, as Hertz was struggling financially and ultimately filed for bankruptcy in May 2020 due to the impact of the COVID-19 pandemic on the travel industry. Investors who held these bonds saw the value of their investment decline sharply as a result.

This example highlights the risks and rewards of investing in high-yield corporate bonds. While the potential for high returns can be attractive, investors must also be prepared for the possibility of significant losses if the issuing company experiences financial difficulties.

Not All Bonds Are the Same