What are high-yield corporate bonds?
High-yield bonds are corporate bonds with a credit rating below BBB. About 25% of corporate bonds are considered high-yield. They offer higher interest rates than government-backed bonds (e.g., Government 10-Year bonds), to compensate investors for higher risk of default. Let’s step back for a minute and explain a confusing bond term: yield. Coupon yield is the amount a bond pays out in interest divided by the face value of the bond. Since bonds often trade on open markets, bond prices can fluctuate, so there’s another yield term: current yield. Current yield is the coupon payment divided by the current market price of the bond. Current yield = Coupon payment / Market price So, if the market price of a bond goes down because investors perceive more default risk, the current yield goes up. If there’s a bond with a $100 par value paying 5% per year, the payment is $5. If the market price is $95, the current yield would be $5/$95 = 5.26%. One way to assess the overall high-yield bond mark
