High-yield (junk) bonds

High-yield bonds are debt instruments offering a high return with a high risk. Credit ratings of less than Baa3 or BBB− are non-investment and are often labelled as ‘junk’. They may be either unsecured or secured but rank behind senior loans and bonds. This type of debt generally offers interest rates 2–9 percentage points more than that on senior debt and frequently gives the lenders some right to a share in equity values should the firm perform well. This kind of finance ranks for payment below straight debt but above equity – it is thus described alternatively as subordinated, intermediate or low grade. With the prevalence of continued low interest rates investors have been ...

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