High-Yield Bond

In the financial world a high-yield bond may also be referred to as a non-investment grade or "junk" bond. These issues carry a high risk of default but are attractive to investors due to their typically high yield.

There are two levels of risk associated with these issues - interest rate risk and credit risk. The interest rate risk refers to the potential for the value of the bond to change in relation to alterations in the structure or level of interest rates. The credit risk is a reference to the potential of default, the chance that the debtor or bond issuer will be unable to pay off the bond at the point of maturity.

In the United States bonds are rated by S&P, Moody's, and Fitch Ratings. The most popular scale for assessing risk level of a bond follows a pattern of increasing risk : AAA, AA, A, BBB, BB, B, CCC, CC, and C. AAA bonds would be considered zero risk in this system with junk bonds occupying the lower end of the scale.

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