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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.
A bond is considered investment grade or IG if its credit rating is BBB− or higher by Fitch Ratings or S&P, or Baa3 or higher by Moody's, the so-called "Big Three" credit rating agencies. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.
Corporate bonds are divided into two main categories High Grade (also called Investment Grade) and High Yield (also called Non-Investment Grade, Speculative Grade, or Junk Bonds) according to their credit rating. [5] Bonds rated AAA, AA, A, and BBB are High Grade, while bonds rated BB and below are High Yield.
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 ...
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.
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 ...
Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions, such as "the obligor's capacity to meet its financial commitment on the obligation is extremely strong", (from a Standard and Poor's definition of a AAA-rated bond) or "less vulnerable to non-payment than other speculative issues ...
A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk.