HIGH-YIELD BOND
Back to GlossaryDefinition
Debt that has been given a low credit rating, below investment grade. These are riskier because there is a higher chance of default. Investors are compensated with higher interest rates which is why these are also called high-yield bonds.
Summary
A high-yield bond, also known as a 'junk bond,' is a corporate bond that offers higher interest rates than investment-grade bonds because it carries greater risk of default. These bonds are issued by companies with lower credit ratings (typically BB+ or below by S&P, or Ba1 or below by Moody's). While they provide attractive returns to compensate investors for the additional risk, they are more volatile and have higher default rates than safer government or investment-grade corporate bonds.
Usage Context
Essential when studying corporate finance, portfolio management, credit analysis, and risk-return trade-offs. Particularly important when analyzing fixed-income investments, understanding credit markets, and making asset allocation decisions.
Common Confusions
- Thinking higher yield always means better investment without considering risk
- Confusing high-yield bonds with high-dividend stocks
- Assuming all corporate bonds are high-yield
- Not understanding that bond prices and yields move inversely
- Believing high-yield bonds are as safe as government bonds
