High Yield Bonds

From Bogleheads

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High yield bonds, also called junk bonds, are corporate bonds with lower credit quality than top credits. These companies are at much greater risk of default than higher quality credits and, as a result, pay higher coupon interest rates than comparable high quality corporate bonds.

Contents 1 Definition 2 Risks 2.1 Credit risk 2.2 Call risk 3 Role in a portfolio 4 Funds 5 Papers 6 Further Reading 7 How to Cite

Definition

High Yield Bond

Risks

High yield bonds inherit risks applicable to bonds, some of which are pronounced in high yield bonds.

Credit risk

Since high yield bonds are issued by companies with low credit ratings, there is a greater risk that the issuers default.

Call risk

Issuers call their bonds when the interest rate goes down. High yield bonds come with additional call risk. If the issuers' credit ratings improve, they can call the existing bonds and borrow money at a lower interest rate. This type of call risk is not applicable to bonds with high ratings.

Role in a portfolio

Funds

• Vanguard High-Yield Corporate Fund
• iShares iBoxx $ High Yield Corporate Bd (HYG)
• SPDR Lehman High Yield Bond (JNK)

Papers

• Credit Risk: How Much? When? by William Bernstein
• Is Default Event Risk Priced in Corporate Bonds? by Joost Driessen of the University of Amsterdam (March 2002)
• The Investment Performance and Market Size of Defaulted Bonds and Bank Loans: 2006 Review and 2007 Outlook by Altman, Edward I. and Swanson, Jeffrey
• Determinants of Recovery Rates on Defaulted Bonds and Loans for North American Corporate Issuers: 1983-2003 by Cantor, Richard Martin and Varma, Praveen, Journal of Fixed Income, December 2004

Further Reading

• Larry E. Swedroe, Joseph H. Hempen (2005). The Only Guide to a Winning Bond Strategy You'll Ever Need.

How to Cite

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Bonds
Bonds	Treasury Inflation Protected Securities • I Savings Bonds • EE Savings Bonds • Corporate Bonds • Zero-coupon bond‎ • Mortgage Backed Securities • Municipal Bonds • Convertible Bonds • High Yield Bonds • Emerging Market Bonds
Bond Topics	Bond Basics • Bonds: Advanced Topics • Laddering Bonds or CDs • Individual Bonds vs a Bond Fund • I Bonds vs TIPS
Research Resources	Vanguard SEC Filings: Taxable Fixed Income Funds • Vanguard SEC Filings: Tax-Exempt Fixed Income Funds