If you're curious about what you can get from a high-yield index, it's important to understand the two different elements that go into it. You've probably heard about the bond market index, and maybe you've heard about the high-yield bonds market. A high-yield index is essentially a bond market index that focuses upon high-yield bonds. Essentially, that's all there is to it, but let's go into a little more depth about what these things are.
What's a bond market index?
Again, a high-yield index is a very specialized type of bond market index, and bond market indices are listings of bonds and similar market instruments. The listing usually takes into account the underlying financial processes of each bond and presents this information according to a series of standardized measurements.
On a broad level, the bonds that a market index reports upon may be corporate bonds, mortgage-backed securities, government bonds, high-yield bonds, or any number of other more esoteric types of instruments. In general, they will be classified according to things like credit rating, maturity, rate-of-return, yield, convexity, and duration, and they will be weighted in terms of market capitalizations.
Because of the complex nature of bonds, working with a bond market index can be slightly more advanced than working with a stock market index. That's why beginning investors usually start with stock trading and later move on to the more advanced types of investment such as bonds and mutual funds.
What's a high-yield bond?
If you know what a bond is, it's not that hard to figure out what a high-yield bond is, although it does get quite complicated. Essentially, a high-yield bond is any type of bond that has been rated low and thus comes with a high degree of risk of default and other negative price crash events. Because of this high risk, which the buyer agrees to take on, these bonds typically come with much higher interest rates than standard types of bonds.
In the last decade, the sale of these bonds has exploded, perhaps reflecting the highly speculative style of investment that has been popular over the last few years and which likely contributed to the recent economic crisis. However, although this trading philosophy has played a large role in bringing us to this place, the problems come from the people who take it to unreasonable levels.
If you moderate your high-yield bond trading, you will not get into trouble. Of course, it should not be your primary investment strategy. That goes without saying. If anything, it should just be a small percentage of what you do. Many financial experts recommend your high-yield bond investments should make up no more than 10% of your overall portfolio.
And if you really want to be smart about it, it's a good idea to use a high-yield index that is reputable and experienced in the business. Don't just use any service you find on Google. Some of the better ones out there are from Merrill Lynch, Barclays, Bear Stearns, and CSFB. While none of these indices are foolproof, they tend to be better than the rest.
What's a bond market index?
Again, a high-yield index is a very specialized type of bond market index, and bond market indices are listings of bonds and similar market instruments. The listing usually takes into account the underlying financial processes of each bond and presents this information according to a series of standardized measurements.
On a broad level, the bonds that a market index reports upon may be corporate bonds, mortgage-backed securities, government bonds, high-yield bonds, or any number of other more esoteric types of instruments. In general, they will be classified according to things like credit rating, maturity, rate-of-return, yield, convexity, and duration, and they will be weighted in terms of market capitalizations.
Because of the complex nature of bonds, working with a bond market index can be slightly more advanced than working with a stock market index. That's why beginning investors usually start with stock trading and later move on to the more advanced types of investment such as bonds and mutual funds.
What's a high-yield bond?
If you know what a bond is, it's not that hard to figure out what a high-yield bond is, although it does get quite complicated. Essentially, a high-yield bond is any type of bond that has been rated low and thus comes with a high degree of risk of default and other negative price crash events. Because of this high risk, which the buyer agrees to take on, these bonds typically come with much higher interest rates than standard types of bonds.
In the last decade, the sale of these bonds has exploded, perhaps reflecting the highly speculative style of investment that has been popular over the last few years and which likely contributed to the recent economic crisis. However, although this trading philosophy has played a large role in bringing us to this place, the problems come from the people who take it to unreasonable levels.
If you moderate your high-yield bond trading, you will not get into trouble. Of course, it should not be your primary investment strategy. That goes without saying. If anything, it should just be a small percentage of what you do. Many financial experts recommend your high-yield bond investments should make up no more than 10% of your overall portfolio.
And if you really want to be smart about it, it's a good idea to use a high-yield index that is reputable and experienced in the business. Don't just use any service you find on Google. Some of the better ones out there are from Merrill Lynch, Barclays, Bear Stearns, and CSFB. While none of these indices are foolproof, they tend to be better than the rest.
Source...