High-Yield Bond

Loading the player...

What is a 'High-Yield Bond'

A high-yield bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds.

Based on the two main credit rating agencies, high-yield bonds carry a rating below 'BBB' from S&P, and below 'Baa' from Moody's. Bonds with ratings at or above these levels are considered investment grade. Credit ratings can be as low as 'D' (currently in default), and most bonds with 'C' ratings or lower carry a high risk of default; to compensate for this risk, yields will typically be very high.

Also known as "junk bonds".

BREAKING DOWN 'High-Yield Bond'

All "junk" connotations aside, high-yield bonds are widely held by investors worldwide, although most participate through the use of mutual funds or exchange-traded funds. The yield spread between investment grade and high-yield will fluctuate over time, depending on the state of the economy, as well as company and sector-specific events.

Generally, investors in high-yield bonds can expect at least 150 to 300 basis points greater yield compared to investment-grade bonds at any given time. Mutual funds provide a good way to gain exposure without the undue risk of investing in just one issuer's junk bonds.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Bond Buyer 20

    A representation of municipal bond trends based on a portfolio ...
  3. Investment Grade

    A rating that indicates that a municipal or corporate bond has ...
  4. Combination Bond

    A bond, typically a municipal bond, that has financial backing ...
  5. Bond Option

    An option contract in which the underlying asset is a bond. Other ...
  6. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
Related Articles
  1. Investing

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  2. Bonds & Fixed Income

    High Yield Bond Investing 101

    Taking on high-yield bond investments requires a thorough investigation. Here are looking the fundamentals.
  3. Bonds & Fixed Income

    Are High-Yield Bonds Too Risky?

    Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio.
  4. Stock Analysis

    Why Everyone Is Piling into Junk Bonds

    Odlum Brown fixed income strategist Hank Cunningham likes exchange traded funds as a way to get exposure to high-yield bonds (also known as junk bonds). Here are the details, writes Rob C ...
  5. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
  6. Bonds & Fixed Income

    Junk Bonds in Stressed Market Conditions

    In stressed market conditions, particularly in economic recessions, junk bonds should be examined and monitored with additional prudence.
  7. Investing Basics

    Explaining Bond Ratings

    A bond rating is a grade given to a bond to indicate its creditworthiness.
  8. Bonds & Fixed Income

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  9. Investing

    Is the Junk Bond Market Signalling a Correction?

    Is the junk bond market signalling a correction?
  10. Investing Basics

    4 Ways Bonds Can Fit Into Your Portfolio

    If you're looking to have some bonds in your portfolio for 2012, we tell you what to look for.
RELATED FAQS
  1. How safe are high yield bonds?

    Learn how high-yield bonds have a greater risk of default than investment grade bonds and why they offer higher amounts of ... Read Answer >>
  2. Why has the market for high yield bonds grown so much?

    Discover information on the high-yield bond market and learn the reasons why this investment market has grown so rapidly ... Read Answer >>
  3. What are the highest-yielding investment grade bonds?

    Learn how Standard & Poor's and Moody's rate bonds. Understand what investment grade bonds offer the best yield. Read Answer >>
  4. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  5. Why are simple-interest loans preferred by payday loan companies and pawn shops?

    Learn how you can invest in the corporate bond market without investing a large amount of capital through bond funds and ... Read Answer >>
  6. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center