High-yield bond

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A high-yield bond is a bond with a sub-investment (speculative) grade credit rating at the time of issue or subsequently.

This type of bond is used particularly to finance leveraged buy-outs and to pay higher yields to investors than bonds with higher ratings do.

The term, therefore increasingly refers to financial instruments with speculative credit ratings.

Also known as a Junk bond.

Paradoxically enough, high-yield bonds cost less than investment grade bonds but yield higher returns.

And they turn cheaper when investors sell them and their price is pushed lower, due to risk aversion in the market or because of their falling out of favour due to any reason.

Their yields then inch higher, as yields move in inverse proportion to prices, and it looks as if they wish to allure investors back with their higher yields.

But then investors need to beware this song of the market, much like sailors are wary of the siren of the seas that lures them to their destruction.

See also