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In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events but offer higher yields than investment-grade bonds in order to compensate for the increased risk.
High grade corporate bonds usually trade at market interest rate but low grade corporate bonds usually trade on credit spread. [12] Credit spread is the difference in yield between the corporate bond and a Government bond of similar maturity or duration (e.g. for US Dollar corporates, US Treasury bonds ).
Non-Investment Grade (also known as speculative-grade) BB : An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial ...
Yields for these non-investment-grade bonds are higher than government bonds, meaning investors can earn more in income relative to the price they paid for the bonds.
Investment-grade bonds have a low risk of default, which is the possibility of the issuer missing an interest payment. The entities issuing these bonds are generally trustworthy when it comes to ...
An insurance company issues bonds through an investment bank, which are then sold to investors. Catastrophe bonds are non-investment grade corporate bonds (roughly equivalent to B or BB) with floating interest rates, [1] [2] and have an average maturity of 3 years with some up to 5 years but are uncommon.
Starting in the late 1970s, non-investment grade public companies were allowed to issue corporate debt. The next innovation was the advent of Derivatives in the 1980s and onwards, which saw the creation of Collateralized debt obligations , Residential mortgage-backed securities and the advent of the Structured products industry.
Many investment-grade securities are traded at a spread to the Treasury curve, with the size of this spread depending on current economic conditions and the credit rating of the individual security. For instance, in April 2005 General Motors debt was downgraded to non-investment, or junk, status by the ratings agencies. As a result, the credit ...