High-Yield Bond
A bond rated below investment grade, offering a higher coupon to compensate for higher default risk.
How it is identified
Test: the rating is BB+ or lower on the standard scale
Unit
qualitative
In depth
The high yield is compensation for risk that is expected to materialise in some cases, not a superior return available for free — across a portfolio of such bonds, defaults are the normal outcome for a fraction of them. Because of that, high-yield investing requires diversification across many issuers, which is impractical for an individual buying a handful of NCDs. In India the segment is thin and illiquid, so exiting a deteriorating credit is often not possible at a reasonable price. The category's returns are also equity-like in stress, since defaults cluster in downturns exactly when equities fall.
Worked example
A portfolio of bonds yielding 12% against a 7% risk-free rate carries a 5-point spread. If 4% default annually with 60% loss, the expected credit loss is 0.04 x 0.60 = 2.4 points, leaving 2.6 points of genuine compensation.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “High-Yield Bond” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.