High-Yield Bond

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DEFINITION of 'High-Yield Bond'

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.

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RELATED FAQS
  1. What are some examples of high yield bonds?

    Issuers of high-yield bonds can be firms from virtually any market sector. The noninvestment grade rating of their bond issues ... Read Full Answer >>
  2. Why are high yield bonds typically lower rated bonds?

    The term "high-yield bond" is a bit of a misnomer. It is not the case that high-yield bonds tend to be lower-rated; instead, ... Read Full Answer >>
  3. What are the top high yield bond ETFs?

    Three of the most popular high-yield bond exchange-traded funds, or ETFs, are the Peritus High Yield ETF (HYLD), the SPDR ... Read Full Answer >>
  4. How safe are high yield bonds?

    High-yield bonds, also commonly known as junk bonds, have lower credit ratings than investment grade corporate bonds as well ... Read Full Answer >>
  5. Why has the market for high yield bonds grown so much?

    Reasons for the rapid growth of the high-yield bond market include the creation of new types of issues, a prolonged period ... Read Full Answer >>
  6. What forms of debt security are available for the average investor?

    Common types of debt securities available to the average investor include U.S. Treasury securities, corporate bonds and municipal ... Read Full Answer >>
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    Investors should care about risk-weighted assets because they show how much of a bank's assets are susceptible to market ... Read Full Answer >>
  8. How can you use a debt service coverage ratio (DSCR) to evaluate municipal bonds?

    Municipal bonds offered as debt securities from states, cities and other municipalities offer investors an opportunity to ... Read Full Answer >>
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