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High Yield

High yield bonds, also known as junk bonds or non-investment grade bonds, are debt securities issued by companies with lower credit ratings and higher default risk. They offer higher yields (interest rates) than investment-grade bonds to compensate investors for the increased risk.

Rating Scale

Credit rating agencies like Moody's, Standard & Poor's (S&P), and Fitch assign ratings to bonds based on the creditworthiness of the issuer. The rating scale categorizes bonds into investment-grade and high-yield (non-investment grade) bonds:

  • Investment-Grade Bonds: Bonds rated BBB- or higher by S&P and Fitch, or Baa3 or higher by Moody's, are considered investment-grade. These bonds have a relatively low risk of default.
  • High-Yield Bonds: Bonds rated below BBB- by S&P and Fitch, or below Baa3 by Moody's, are considered high-yield or junk bonds. These bonds have a higher risk of default due to the issuer's lower creditworthiness.

The rating scale for high-yield bonds typically ranges from BB+ (highest non-investment grade) to D (in default), with lower ratings indicating higher default risk. For example, S&P and Fitch use the following ratings for high-yield bonds:

  • BB+, BB, BB-
  • B+, B, B-
  • CCC+, CCC, CCC-
  • CC
  • C
  • D (in default)

High-yield bonds offer higher yields to compensate investors for the increased risk of default. However, they are also more volatile and sensitive to changes in the economic environment compared to investment-grade bonds.