Also known as junk bonds, high-yield bonds are bonds issued by companies that are judged likely, relative to stronger companies, to default by failing to make interest and principal payments on schedule. The companies are typically small, but they may be large. At the end of 1999, there were about $600 billion of high-yield bonds outstanding.
A bond is termed high-yield if its carries a speculative-grade rating from Moody's Investors Service, Standard & Poor's or both.
A high-yield bond will trade at a yield that is high relative to the yields of better-quality bonds of comparable maturity. Its yield may be higher because it has a bigger coupon, or because it trades at a lower price. A high-yield bond that trades at a price significantly below par may not always have been a high-yield bond. It may have started out as an investment-grade bond, trading closer to par, and become a high-yield bond as its price dropped, reflecting deterioration in the issuer's ability to service its debt.
Because of the risk of default, high-yield bonds are not recommended for individual investors, except through mutual funds or in other large, diversified portfolios.