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High Yield Bonds

High yield bonds are bonds rated below ‘Investment Grade’ by Moody, Standard and Poor, or Fitch rating services. Bonds with credit ratings lower than Investment Grade are considered weak and are considered speculative. A table illustrating these bond ratings is shown below.

Bond Credit Quality Ratings of Different Rating Agencies
Investment Grade Moody's Standard & Poor's Fitch Ratings
Highest Quality Aaa AAA AAA
High Quality (Very Strong) Aa AA AA
Upper Medium Grade (Strong) A A A
Medium Grade Baa BBB BBB
Below Investment Grade      
Lower Medium Grade (Somewhat Speculative) Ba BB BB
Low Grade (Speculative) B B B
Poor Quality (May Default) Caa CCC CCC
Most Speculative Ca CC CC
No Interest Being Paid or Bankruptcy Petition Filed C D C
In Default C D D

The market for high yield bonds has grown. In addition to being populated by bonds that were once investment grade, the market contains many bonds issued by emerging companies seeking capital.

High yield bonds have the potential for higher returns due to higher coupon rates and the potential for capital appreciation. This occurs when the underlying corporations improve their financial conditions. Capital appreciation can also occur as a result of interest rate changes in the overall markets.

High yield bonds have a corresponding higher risk due to a number of factors including a higher default risk, higher sensitivity to the business cycle, lower liquidity, and higher difficulty in getting information about speculative companies.