High yield bond
Capital MarketsA bond from a below investment grade issuer, paying a higher coupon to compensate for the credit risk.
Also written: junk bond, junk bonds, speculative grade
Rated below BBB minus or Baa3, and still widely called a junk bond, it is the bond market's below investment grade end. Buyers are dedicated high yield funds and credit investors rather than the insurers and pension funds that hold investment grade paper.
Against a leveraged loan it differs in ways that matter. It is usually fixed rate rather than floating, longer dated, and carries call protection restricting early repayment, whereas a loan is generally prepayable at par. It also frequently ranks behind the senior secured loans in the structure.
That combination of duration and prepayment protection is what splits the investor base: a bond buyer wants a coupon locked in for years, a loan buyer wants protection against rising rates and accepts being repaid early.
The indenture rather than a credit agreement governs it, and covenants are incurrence based, so the issuer is restricted only when it takes a specified action.