High-Yield (Junk) Bond
A below-investment-grade bond paying more to compensate for default risk.
What is High-Yield (Junk) Bond?
Debt rated below BBB-/Baa3. Higher coupons compensate for materially higher default probability. High yield behaves more like equity than like Treasuries in a crisis, which undermines its use as a diversifier.
High-Yield (Junk) Bond: a worked example
A junk index yielding 8% against Treasuries at 4% carries a 400 bp credit spread.
More terms in Securities & Instruments
Common Stock
An ownership share in a company, with voting rights and last claim on assets.
Preferred Stock
Equity with a fixed dividend and priority over common, usually without votes.
Bond
A loan to an issuer that pays interest and returns principal at maturity.
Coupon Rate
The bond's stated annual interest as a percentage of par.
Yield to Maturity (YTM)
The total annualized return if you buy today and hold to maturity.
Par Value (Face Value)
The principal repaid at maturity, conventionally $1,000 per bond.
Duration
A bond's price sensitivity to a 1% change in interest rates.
Credit Rating
An agency's assessment of an issuer's likelihood of default.