High-Yield Bond: Meaning and Example

A high-yield bond is a bond issued by a borrower with lower credit quality than investment-grade issuers. Because default risk is higher, investors demand a higher yield.

How It Works

High-yield bonds trade on a mix of interest-rate risk and credit-spread risk. Their prices often react strongly to changes in default expectations, economic stress, and liquidity conditions.

Worked Example

Suppose a speculative-grade issuer sells a bond at a yield of 8.5% while a safer issuer with similar maturity pays 4.5%. The extra yield compensates investors for higher expected risk.

Scenario Question

An investor says, “High yield means the bond is automatically a good bargain.”

Answer: Not necessarily. The higher yield may simply reflect higher default risk or weaker recovery prospects.

Related Terms

• Credit Spread: High-yield bonds usually trade at wider spreads than safer bonds.
• Default Risk: Default risk is a core reason high-yield bonds offer higher returns.
• High-Yield Bond Spread: The spread shows how much extra yield the market demands for lower credit quality.