The Pros and Cons of High Yield Investment
High yield bonds—much like the symbolic roulette wheel—have the potential to bring either financial joy or heartache, depending upon how adeptly you play the investment game. High yield bonds are those rated below an investment grade (AAA, AA+, AA, etc.). Because of this, they are also known as "junk bonds."
Typically, high yield bonds carry a high risk. Whether this is the right investment strategy for you is a decision only you can make. It mainly depends upon your tolerance level for loss: you can net more, and you can lose more, too.
With the current uncertainty in the market, many "Main Street" investors are leaving high yield bonds to those with the financial grit to ride out such uncertain waters of investing. This is understandable. But there are high yield investment opportunities that might not be so tempestuous—if one knows where to look.
Short Term High Yield Investments
Many people prefer to forgo active stock market trading and instead invest in short-term high yield investments such as money markets. These can provide much higher interest rates than a regular savings account without the extreme volatility of high yield bonds on Wall Street. But even money market accounts have their caveats.
The rates offered can vary widely from bank to bank, so shop around if you are considering this investing route. Many banks impose a minimum amount for deposit in order to open a high yield money market account. The amount you insert into the account can affect the rate, too.
Money market accounts as short term high yield investments may carry penalties or limit the amount of withdrawals you can make within a set period of time if you try to access them too soon. Be sure to consult a financial advisor, so you are well aware of any downsides to a money market account.
Prosper as a High Yield Investment
Prosper holds the potential for delivering high yield. But since our marketplace is built upon peer-to-peer lending—not selling bonds—our model is different from what you will encounter in the stock market.
Through us, you can sign up as an investor and select loan listings from our pool of borrowers. After a borrower joins and posts a loan listing, we assign each loan listing a Prosper Rating, using our own proprietary system. This rating represents an estimated average annualized loss rate range for that listing. You can use Prosper Ratings as a partial guide to help you decide which listings you want to invest in.
Our higher risk Prosper Ratings could be a high yield investment analogous to high yield bonds in terms of risk and reward.
For example, some of our E listings may deliver a high yield of up to 35%—but, like high yield bonds, investing in these accounts carries high risks as well. Since these borrowers typically have a shakier financial history, the risk is greater that they might not repay their loan.
This is a high yield investment option that we are providing for our investors, and it may or may not be right for you. It’s important to note that Prosper works vigorously with debt settlement companies and local authorities to recover funds, should the need arise.
Diversification of your investment may help mitigate risks by reducing the impact of any one default. This is why we offer Quick Invest, which allows you to set basic or detailed lending criteria and invest in listings that reflect the investment path you believe is best for you.
How Does Prosper Work?
Investors create an account, set their parameters, and purchase Prosper Notes. Each Prosper Note corresponds to a listing which sets forth the relevant details about the loan, including loan amount, Note rate, yield percentage, and borrower information. Any payment from a Prosper Note is dependent on the payments Prosper receives on the corresponding loan.
The Notes that correspond to specific borrower listings are offered by prospectus. Investors should read the complete description of the Notes and risks associated with making an investment in the Notes as well as other information about the Prosper model in the prospectus.
Prosper Notes are risk bearing and speculative investments for suitable investors only. If a borrower fails to make payments on the corresponding borrower loan related to your Prosper Note, you will not receive payments on your Note. There is the potential that you will not receive any payments on a Prosper Note. You should review the prospectus before investing through Prosper. Notes through Prosper are not FDIC-insured and may lose value. Notes have no Prosper or bank guarantee.