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About Corporate Bonds

High Yield Bonds Glossary

Call

A one-way option of the issuer (not the investor) that allows the issuer to retire bonds by paying investors a stated price, usually a premium above the par value. Many high-yield bonds allow issuers to call bonds after the first five years.

Credit rating

A formal evaluation of a company’s financial health and ability to repay debt obligations, conducted by a rating agency such as Standard & Poor’s, Moody’s and Fitch Ratings. The agency’s evaluation is summarized in a rating, such as BB.

Current yield (CY)

A calculation of the annual interest payment from a bond divided by the current market price of the bond.

Default

The failure of a borrower to pay interest or repay principal in a timely manner. For bond issuers, conditions for default are defined in a legal document called a “bond indenture.”

Investment grade

Bonds considered suitable for purchase by prudent investors. Bonds rated Baa3 and above by Moody’s and BBB- and above by Standard & Poor’s and Fitch Ratings are considered investment grade.

Junk bond

In some cases, the term “junk bonds” is used to refer to all high-yield bonds—i.e., those that are rated below investment grade or are not rated. In other cases, the term refers to the lower tiers of high-yield bonds in credit quality. Many of today’s high-yield bonds, particularly those rated Ba by Moody’s or BB by other rating agencies, are not considered “junk.”

Liquidity

The ability to trade bonds efficiently without causing any major changes in their prices.

Maturity

The date upon which a loan becomes due and the borrower must repay the lender principal and any final interest. Most bonds have a fixed maturity date (although many may be “called” prior to maturity).

Recession

A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).

Total return

A measure of bond investment return that includes both interest and price change. The total return on investments is generally expressed as an annualized rate, and it assumes reinvestment of all interest back into the investment.

Yield to maturity (YTM)

A calculation of the total return to a bond investor who holds to maturity. YTM includes interest payments and any difference between the current price and maturity (par) value. It does not include return of principal at maturity. YTM is calculated based on the current market price.

Yield spread

The difference in yield between two bonds or bond indices.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.