High-Yield BondsHY
High-yield bonds, or junk bonds, are bonds rated below investment grade — BB+ or lower at S&P, Ba1 or lower at Moody's. They pay higher interest to compensate for a higher risk of default.
Some companies can't borrow at investment-grade rates because their finances are riskier. They issue high-yield bonds instead, offering investors more interest in exchange for more risk. High yield behaves partly like a bond and partly like a stock. This entry explains ratings, spreads, defaults and how the market moves.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- Junk bonds, Non-investment-grade bonds, Speculative-grade bonds
- Updated
High-yield bonds in plain words
A high-yield or junk bond is issued by a borrower seen as having a higher default risk, shown by a low rating such as Ba or lower at Moody's or BB or below at S&P.1
The high-yield spread is the difference in yields, quoted in basis points or percentage points.2
Investment-grade ratings start at BBB− at S&P and Baa3 at Moody's, so anything below is high yield.3
How to evaluate a high-yield bond, step by step
Check the rating
BB, B or CCC. See Credit Rating.
Check the spread
Extra yield over Treasuries. See Credit Spread.
Check the business
Cash flow and debt load. See Interest Coverage Ratio.
Check seniority
Where you rank in default. See Debt Seniority.
Estimate recovery
What's left after default.
Diversify
Defaults are lumpy. See Diversification.
Worked examples
Example 1 — Spread
420 bpsA B-rated bond yields 8.5%; a similar Treasury yields 4.3%.
| Spread | 8.5% − 4.3% = 420 bps |
The spread compensates investors for default risk and is quoted in basis points.2
Example 2 — Expected loss
+2.4% netAnnual default risk 3%, recovery 40%, spread 4.2%.
| Expected loss | 3% × (1 − 40%) = 1.8% |
| Spread left after losses | 4.2% − 1.8% = 2.4% |
High yield only pays off if spreads more than cover expected default losses. See Default Risk.
Example 3 — Recession
≈ −18%Spreads widen from 350 bps to 800 bps; bond duration 4.
| Spread change | +4.5 points |
| Approximate price change | −4 × 4.5% = −18% |
In downturns, high-yield prices can fall sharply as risk premiums jump. See Recession.
High yield vs investment grade
| Aspect | High yield | Investment grade |
|---|---|---|
| S&P rating | BB+ and below | BBB− and above |
| Yield | Higher | Lower |
| Main risk | Default | Interest rates |
| Behaves like | Part bond, part stock | Mostly bond |
How investors use high yield
Income
Higher coupons. See Coupon Rate.
Economic outlook
Spreads signal credit stress. See Business Cycle.
Diversified funds
Spreading default risk. See Mutual Fund.
Distressed investing
Buying beaten-down debt.
Advantages and disadvantages
Advantages
- Higher income.
- Less sensitive to rates than long IG bonds.
- Upside if credit improves.
Disadvantages
- Higher default risk.
- Prices fall hard in recessions.
- Less liquid in stress.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why "junk"
Beginner
The nickname reflects the higher default risk, not that the bonds are worthless; many issuers pay in full. See Credit Rating.
Spreads as a signal
Intermediate
Widening high-yield spreads show investors demanding more pay for risk, often ahead of economic weakness.2
Recovery and seniority
Advanced
In default, secured and senior bondholders typically recover more than subordinated holders. See Debt Seniority.
Common mistakes
Chasing yield alone
High yields can signal trouble.
Ignoring liquidity
Selling in a crisis can be costly.
Concentrating
One default can hurt badly.
Forgetting recovery
Expected loss = default × (1 − recovery).
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- High-yield bonds are rated below investment grade.
- They pay more for higher default risk.
- Spreads measure the risk premium.
- They fall sharply in recessions.
- Diversification and recovery matter.
Frequently asked questions
Are junk bonds a good investment?
What is a fallen angel?
Do high-yield bonds behave like stocks?
Further learning
- Investment Grade
The safer tier.
- Credit Spread
Pricing default risk.
- Default Risk
The core risk.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FINRA. Bonds (opens in a new tab) Checked .
- Corporate Finance Institute. High-Yield Bond Spread (opens in a new tab) Checked .
- Corporate Finance Institute. Investment-Grade Bonds (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.