High yield bonds

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.

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.

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