High-yield bond
High-yield bonds have greater perceived credit risk than investment-grade debt under the relevant rating scale. Investors generally seek a higher yield as compensation, although the actual spread also reflects liquidity, market conditions, maturity and other features. A high coupon does not guarantee the promised return: default, restructuring or sale before maturity can cause losses. Rating scales and thresholds vary by agency and ratings can change. The issuer's ability to service and refinance debt should be assessed alongside priority and recovery prospects.
Worked example
A company issues a sub-investment-grade bond yielding 9%, while a comparable lower-risk reference yields 5%. The 4 percentage point spread is compensation for several differences and does not guarantee that an investor will receive 9%.
Common mistake
Treating a high stated yield as a guaranteed high realised return or equating the whole spread to default probability.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |