Investment Grade vs High Yield Bonds

Bonds are one of the most efficient instruments of raising capital, used by corporate institutions around the world. Different credit rating agencies assign a certain credit score to every corporate bond. You can use these scores to analyse the creditworthiness of these bonds and take appropriate investment decisions. 

Based on their credit ratings, corporate bonds are divided into two categories – investment grade and high yield bonds. The former is a low risk bond, whereas the latter is highly risky but can offer greater returns. In this article, we will discuss the working of these bonds and their other aspects. 

What Are Investment Grade Bonds?

Investment grade bonds are low risk debt securities, and subsequently, the return potential on these bonds is low to moderate. However, these come with very high credibility and lower chances of default. 

They come with some of the highest credit ratings given by various credit rating agencies. As the risk associated with these is quite less, they can be an ideal investment alternative for conservative investors. However, as the risk quotient is less in these bonds, interest rates offered by issuers are quite less than other bonds. 

What Are High Yield Bonds?  

As the name suggests, these bonds tend to offer a higher yield when compared to other corporate bonds. The high yield is mainly due to the high risk factor associated with them. A high-yield bond comes with a lower credit rating assigned by various credit rating agencies. Hence they are also called non-investment grade bonds.

The high returns on these bonds serve as compensation for the higher risk; it’s a way to increase their attractiveness among different investors. Usually, issuers of these bonds are capital-intensive companies having a significantly higher debt-to-capital ratio. 

Also called junk bonds, these instruments witness heavy price volatility and carry a higher chance of default. 

Now that you are aware of what are investment grade and high-yield bonds, let’s understand how are bonds classified as investment grade and high yield bonds. Here are the various ratings given to investment grade and high yield bonds by the top credit rating agencies in India: 

Credit Ratings of Investment Grade and High Yield Bonds 

What Are the Benefits of Investment Grade Bonds?

Here are some advantages associated with investment-grade bonds: 

• Low Risk 

It is a low risk debt instrument when compared to other investment options like stocks and mutual funds. As credit ratings of these bonds are quite high, it has low chances of default. Therefore, in most cases, your money is secured. The risk level is also lower than the risk associated with stocks. This is because of lower price fluctuations as compared to stocks. 

• Fixed Income Source

Another advantage associated with these bonds is that it offers a fixed income stream in the form of coupon payments. You, as a bondholder, have the legal right to receive regular interest income. In case of any violation, there are legal platforms where you can go with your grievances. You can convey your grievances to the complaint cell of Reserve Bank of India in case of government bonds, and reach out to SEBI for complaints regarding corporate bonds.  

10 Best Investment Grade Bonds in India

What Are the Advantages of High Yield Bonds?

Some advantages of investing in high-yield bonds are as follows: 

• High Returns 

These bonds offer one of the highest returns among all the debt instrument categories. It can be quite beneficial for you if you are seeking aggressive returns on your investments. The high returns serve as compensation for the significant risks that these bonds come with. 

• Low sensitivity to interest rates

Another advantage of these bonds is that they have a lower vulnerability towards fluctuation in interest rates. Hence, you can use them for diversification of your total investment basket and provide greater resilience to your portfolios.   

Final Word 

Investment grade and high-yield bonds are two categories of corporate bonds based on risk profile. If you are looking to invest in these bonds, it is important that you consider your investment objectives, risk appetite and taxation before making any decision. 

Frequently Asked Questions 

Q1. Which credit rating agencies in India rate corporate bonds? 

Ans. There are several credit rating agencies in India that indulge in assigning ratings to corporate bonds. Some of them are ICRA, CRISIL, India Ratings and Research and CARE Ratings. 

Q2. How does the economic situation influence bonds?

Ans. Whenever a nation is facing economic hardships or crisis, investors tend to move towards investment-grade bonds that are comparatively more stable. On the other hand, when the economy is undergoing a boom, the demand for high-yielding bonds starts rising. 

Q3. What is the impact of interest rates on a bond’s rating?

Ans. Bonds with a higher tenure or maturity period are more sensitive to changes occurring in market interest rates as compared to bonds with a lower duration. Investment grade bonds have a longer duration, and therefore their ratings can change significantly in times of interest rate volatility. 

Q4. Are investment-grade bonds a good investment option?

Ans. Investment-grade bonds can be a good investment option for you if you are a conservative investor. If you have a low risk appetite and cannot afford to incur losses on your portfolio, you can opt for investing in these types of bonds.