Glossary term
High-Yield Bond
A high-yield bond is a lower-rated bond that pays a higher yield because the issuer has more credit risk.
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What Is a High-Yield Bond?
A high-yield bond is a lower-rated bond that pays a higher yield because the issuer has more credit risk. High-yield bonds are sometimes called junk bonds, though that label can be imprecise.
The higher yield is compensation for taking more risk. The issuer may be more leveraged, less stable, more cyclical, or more vulnerable to economic stress than an investment-grade borrower.
Key Takeaways
- High-yield bonds are lower-rated debt securities.
- They usually pay higher yields than investment-grade bonds.
- The main tradeoff is higher credit and default risk.
- High-yield bonds can behave partly like bonds and partly like risk assets.
- Yield alone does not tell investors whether the risk is worth taking.
How High-Yield Bonds Work
A company issues a bond to borrow money. If investors view the company as risky, they usually demand a higher yield before lending. That higher yield can be attractive, but it comes with greater chance of price declines, credit downgrades, or default.
High-yield bonds may be issued by companies with weaker balance sheets, uncertain cash flow, acquisition debt, or exposure to tough economic conditions.
High-Yield Versus Investment-Grade Bonds
Feature | High-yield bond | Investment-grade bond |
|---|---|---|
Credit quality | Lower-rated | Higher-rated |
Yield | Usually higher | Usually lower |
Default risk | Higher | Lower |
Economic sensitivity | Often higher | Often lower |
Why High-Yield Bonds Matter
High-yield bonds can add income potential to a portfolio, but they should not be treated like cash or safe income. During recessions, credit stress, or market sell-offs, high-yield bond prices can fall sharply.
Investors should review credit quality, diversification, maturity, call features, fund costs, and how high-yield exposure fits with stocks and other risk assets.
The Bottom Line
A high-yield bond offers higher income potential because the borrower is riskier. The higher yield may be worthwhile in some portfolios, but it is payment for credit risk, not free return.