Definition
High-yield bonds are issued by companies with weaker credit profiles, offering yields significantly above investment-grade bonds. Despite the derogatory "junk" label, they represent a legitimate asset class with risk-return characteristics between investment-grade bonds and equities. Default rates typically range from 1-5% annually but spike during recessions.
lightbulb Example
A BB-rated company issues 5-year bonds at 7.5%, compared to 4.5% for similar BBB-rated bonds. The 300bps extra yield compensates for ~3% expected annual default rate plus a recovery-adjusted loss premium.
verified_user Key Points
- Rated BB+ or below by S&P (Ba1 or below by Moody's)
- Spreads of 300-600+ basis points over Treasuries
- Default rates spike during recessions
- Recovery rates average 40-50% in default