High-Yield Bond

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Definition of 'High-Yield Bond'

A high-yield bond (also called a junk bond) is a type of bond that is considered to be of below-investment grade. This means that the bond has a higher risk of default than investment-grade bonds. As a result, high-yield bonds typically offer higher yields than investment-grade bonds.

High-yield bonds are often issued by companies that are in financial distress or that have a history of financial problems. These companies may be unable to obtain financing from other sources, such as banks, so they turn to the bond market.

Investors who purchase high-yield bonds should be aware of the high risk involved. These bonds are not suitable for all investors, and only those who can afford to lose their entire investment should consider purchasing them.

There are a number of factors that can affect the yield of a high-yield bond. These include the credit rating of the issuer, the maturity date of the bond, and the current interest rate environment.

The credit rating of the issuer is the most important factor in determining the yield of a high-yield bond. The higher the credit rating, the lower the yield. This is because investors are more confident that the issuer will be able to repay the bond.

The maturity date of the bond also affects the yield. Longer-term bonds typically have higher yields than shorter-term bonds. This is because investors are willing to accept a lower yield in exchange for the longer term of the investment.

The current interest rate environment also affects the yield of a high-yield bond. When interest rates are low, high-yield bonds tend to have higher yields. This is because investors are looking for higher yields to compensate for the lower interest rates.

High-yield bonds can be a good investment for investors who are looking for high yields. However, it is important to be aware of the high risk involved before investing in these bonds.

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