High-yield bond
A bond rated below the investment grade threshold, carrying a wider spread over government yields to compensate for a higher assessed chance of default.
Example
A wider spread is the market asking a higher price for the same promise, not a mispricing waiting to be collected.
Important
The extra yield is a payment for expected losses across a group of such bonds, not extra return on any single one. Held alone and undiversified, a high-yield bond can behave far more like equity than like fixed income.
Related terms
- Credit spread — The difference between a bond's yield and that of a government bond of the same currency and maturity. It is the market's price for the default risk, the illiquidity and any adverse options the government bond does not carry.
- Investment grade — The band of credit ratings above the threshold that separates the higher-quality tier of bonds from the speculative tier. Many institutional mandates permit holdings only within it.
- Credit rating — An agency's published opinion on the relative likelihood that a specific obligation is repaid, expressed on an ordinal scale and usually paid for by the issuer.
- Default — The failure of an issuer to meet a contracted obligation - a missed coupon, a missed principal repayment, or the breach of a term that permits creditors to demand repayment.
Lessons that explain it
All 578 terms in the Investing glossary