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The junk bond rating means that there is a greater risk that the issuer will default on the debt relative to investment-grade bonds. As a result of this increased risk, junk bonds offer a higher ...
[41] [42] [43] A debt default by energy companies would harm the regional banks of Texas and Oklahoma, potentially causing a chain reaction through the corporate bond market. [44] On 12 March, the spread on junk bonds over U.S. Treasuries increased to 7.42% in U.S. markets, the highest level since December 2015, indicating less willingness to ...
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 to compensate for the increased risk.
The Z-spread of a bond is the number of basis points (bp, or 0.01%) that one needs to add to the Treasury yield curve (or technically to Treasury forward rates) so that the Net present value of the bond cash flows (using the adjusted yield curve) equals the market price of the bond (including accrued interest). The spread is calculated iteratively.
For example, you might pay $5,000 for a zero-coupon bond with a face value of $10,000 and receive the full price, $10,000, upon maturity in 20 or 30 years. Zero-coupon CDs work the same way.
Yield spread can also be an indicator of profitability for a lender providing a loan to an individual borrower. For consumer loans, particularly home mortgages, an important yield spread is the difference between the interest rate actually paid by the borrower on a particular loan and the (lower) interest rate that the borrower's credit would allow that borrower to pay.
There is a time dimension to the analysis of bond values. A 10-year bond at purchase becomes a 9-year bond a year later, and the year after it becomes an 8-year bond, etc. Each year the bond moves incrementally closer to maturity, resulting in lower volatility and shorter duration and demanding a lower interest rate when the yield curve is rising.
Even within the bond portion of your portfolio you can have different kinds of bond ETFs, such as a short-term bond fund, an intermediate-term fund and a long-term fund. Each will respond ...