NEW YORK (CNN/Money) - Do high-yield bond funds behave the same as other bond funds when interest rates go up or down? If not, what moves high-yield bond prices?

-- Joe Torpey, Alexandria, Virginia

Before we get to your answer, let's dispense with the "high yield" euphemism and state plainly what kind of bond funds we're talking about here -- that is, junk funds, or funds that hold bonds that have not received investment-grade ratings from ratings firms like Standard & Poor's and Moody's Investors Service.

I prefer using the junk moniker because it gives investors a better idea of what they're buying -- bonds of a company that the bond-rating community believes has a higher-than-average risk of defaulting.

Okay, now that we've got that out in the open, let's get to the issue of what moves their prices. First, you should know that all bonds are sensitive to one degree or another to changes in interest rates.

Let's say you buy a $1,000 10-year Treasury bond the day it's issued and the bond carries a coupon rate of, say, 4 percent. And let's further assume that shortly after you buy the bond, interest rates go up, so that the next time the U.S. Treasury sells 10-year Treasury bonds they come with a 5 percent coupon. The price of your bond would go down.

That's because its payment stream of $40 a year would be worth less than the payment stream of $50 a year one can now get in the 10-year Treasury bonds carrying a 5 percent coupon rate. In fact, the price of your bond would fall just far enough so that its lower price, combined with its $40-a-year payments, would provide about the same return as the 5 percent Treasury bond.

The longer the term of the bond, the more its price would fall in response to rising rates because you need a bigger price drop to compensate for the longer string of lower interest payments.

The reverse would happen if interest rates fell to, say, 3 percent. In that case, the payments on the 4 percent bond would be more attractive, boosting the price of the bond.

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This simple see-saw relationship exists for junk bonds too, but it isn't as strong. Without going into the boring mathematics behind bond prices, the basic reason is that if interest rates go up, you are able to offset part of the negative effect of rising rates by reinvesting your interest payments at the higher prevailing rates.

If your interest payments are smaller -- that is, the rate the issuer is obligated to pay is lower -- you don't have as much opportunity to compensate for the rate increase because you're not getting as much cash flow from the bond.

The end result is that, all other things being equal, the price of a bond with a high coupon rate won't drop as much as the price of a bond with a lower coupon rate when interest rates rise, nor rise as much if rates fall.

All this is summed up in a bond or bond fund's "duration," a figure that measures its sensitivity to rate changes. If a bond has a duration of 10 years, for example, then the bond's price will decline by roughly 10 percent if interest rates increase one percentage point and by roughly 20 percent if rates jump two percentage points. The bond's price would increase by roughly the same amounts if rates fall.

But interest rates aren't the only risk that bonds face. There's also "credit risk," or what I like to call "deadbeat risk," which is the chance that the issuer won't be able to make good on the bond's payments or repay its principal.

This risk is minimal for high-quality corporate bonds and virtually nonexistent for Treasuries (unless you believe Uncle Sam will renege on his debts -- or, I should say, let you renege on them).

But credit risk is a very big deal for junk bonds. Indeed, it gets to the heart of the reason they're called junk -- the companies that issue these bonds have usually suffered some sort of financial damage or they may simply have shaky finances.

What's more, while high-quality corporate bonds might hold up well even if the issuer defaults because the bond holders would have claim to many of the company's assets, junk bonds may be backed by little in the way of assets.

All of which leads to this big difference between regular bonds and junk bonds: when sophisticated investors evaluate a company's junk bonds, they know that junk bonds don't offer the same protections that regular bonds do. As a result, in many ways they think of junk bonds more like stocks than bonds, which means that economic trends and trends in the stock market often affect junk bond prices as much, if not more, than trends in the bond market.

So, for example, if you own junk bonds of a telecommunications company and the earnings outlook for telecom worsens, your telecom junk bonds could take a big hit regardless of what interest rates do. In short, bond investors are more worried about whether the issuer can make the payments than they are about how the level of interest rates will affect the value of the payments.

All that said, I still think high-yield junk bonds can be a good way to boost the returns on the bond portion of your portfolio. Right now, with Treasury yields so low and investors so jittery about the near-term future of the economy, junk bonds are offering a bigger premium than usual over high-quality bonds.

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That extra yield is no free lunch, however. The bonds are riskier, which is why I think they're only for investors who can tolerate some extra risk and are willing to hold for the long-term. Even then I think they should invest in junk bonds only through junk bond funds, and even then I think junk funds should be a small portion of your bond portfolio, maybe 10 percent or so.

You can screen for junk bond funds by going to our Fund Screener. Two high-yield bond funds with solid records are Northeast Investors (NTHEX: up $0.01 to $6.98, Research, Estimates) and Janus High-Yield (JAHYX: up $0.02 to $8.76, Research, Estimates). But again, it's important to remember that in many ways investing in junk is like investing in stocks. And if the economy goes into a dreaded double-dip recession, these bonds could take a drubbing as bad, if not worse, than what the stock market will get.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 8:40 am on CNNfn.