High Yield Bonds

As its name suggests, a high yield bond (also called "junk bonds") is a link that offers high returns in exchange for a higher risk of default (which was higher in the interest rather than principal).

In the U.S., there are three major rating agencies: S & P, Moody's and Fitch Ratings. The corporate bond rate as a function of default probability and the probability of not receiving interest and principal subsequent to a fault (eg credit risk).

For example, the scale used by S & P and Fitch as follows: AAA, AA, A, BBB, BB, B, CCC, CC, C, and D (sometimes composed of sub-categories). The bonds are rated AAA by S & P are considered "prime, maximum safety, and most government bonds fall into this category.

A credit rating of BBB or higher indicates that the bond is investment grade, while the credit rating below BBB indicates that the link quality non-investment or junk (hence the title of replacement high yield bonds).

Some institutional investors (eg pension funds) are allowed to invest in bonds below a certain level.

For companies whose bonds were rated investment grade, an upgrade to "junk" can be a difficult situation. Not only the newly issued bonds now require interest payments considerably higher, but the market is relatively narrow issues of "junk bonds" may make them more to sell. A link with a credit rating that has dropped below the level of investment is commonly called a "fallen angel".

high yield bonds play an important role in certain investment strategies. A common strategy for high yield bonds is merger arbitrage. In a merger, acquirer would issue junk bonds to help finance an acquisition, after which the purchaser would use the cash flow of the acquired target to pay the debt over a period of time.

For many industries, junk bonds are an important source of capital.

Some recommended reading: beyond junk bonds by Glenn Yago and Susan Trimbath. This book is a comprehensive guide on the market for high performance in general. Includes case studies of real companies and securities industry, as well as comparisons to the private or public equity and fixed income markets.

Another highly recommended title, written by an authority on debt and bankruptcy in trouble is as follows: Bankruptcy, Credit Risk and High Yield Junk Bonds by Edward I. Altman. Includes a section on high-yield junk bond and distressed securities, and other items of scientific contributors around the world.