high-yield bonds

(noun)

In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.

Related Terms

Examples of high-yield bonds in the following topics:

  • Characteristics of Bonds

    • The yield is the rate of return received from investing in the bond.
    • High-yield bonds are bonds that are rated below investment grade by the credit rating agencies.
    • Therefore, because of the inherent riskiness of these bonds, they are also called high-yield or "junk" bonds.
    • This is mainly the case for high-yield bonds.
    • To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.

  • Redeeming Before Maturity

    • For bond issuers, they can repurchase a bond at or before maturity.
    • These bonds are referred to as callable bonds.
    • Most callable bonds allow the issuer to repay the bond at par.
    • This is mainly the case for high-yield bonds.
    • To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.

  • Types of Bonds

    • The most common secured bonds.
    • This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
    • A term bond matures on the same date as all other bonds in a given bond issue.
    • Serial bonds in a given bond issue have maturities spread over several dates.
    • These are high-interest rate, high-risk bonds.

  • Valuing Zero-Coupon Bonds

    • The value of a zero-coupon bond equals the present value of its face value discounted by the bond's contract rate.
    • The discount is a contra-liability linked to the bond payable; this yields a net bond payable of 81,629.79, the bond payable less the discount.
    • The journal entry to recognized the interest expense is: Interest Expense 5,714.09 Discount 5,714.09 The bond discount is reduced by 5,714.09 to 12,656.12, yielding a net bond payable of 87,343.88.
    • A zero-coupon bond is one that does not pay interest over the term of the bond.
    • Zero-Coupon Bond Value = Face Value of Bond / (1+ interest Rate)

  • Bonds Payable and Interest Expense

    • Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder.
    • Example of bonds issued at face value on an interest date:-
    • On 2010 December 31, Valley issued 10-year, 12% yield bonds with a USD 100,000 face value, for USD 100,000.
    • The income statement for each of the 10 years (2010-2018) would show Bond Interest Expense of USD 12,000 (USD 6,000 X 2); the balance sheet at the end of each of the years (2010-2018) would report bonds payable of USD 100,000 in long-term liabilities.
    • Summarize how a company would record the original issue of the bond and the subsequent interest payments

  • Equity Method

    • A calculation can be made to assess whether an equity is over- or under-priced, compared with a long-term government bond.
    • This is called the Yield Gap or Yield Ratio.
    • It is the ratio of the dividend yield of an equity and that of the long-term bond.

  • Defining Liabilities

    • In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.
    • A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit due at a specified or determinable date, on occurrence of a specified event, or on demand.
    • Long-term liabilities have maturity dates that extend past one year, such as bonds payable and pension obligations.

  • What Is R&D?

    • A high technology company such as a computer manufacturer might spend 7%.
    • Under both models, R&D differs from the vast majority of a company's activities which are intended to yield nearly immediate profits or immediate improvements in operations and involve little uncertainty as to the return on investment (ROI).
    • A high technology company such as a computer manufacturer might spend 7%.
    • The extreme needs justify the high risk of failure and consequently high gross margins from 60% to 90% of revenues.
    • Gross profits will be as much as 90% of the sales cost, with manufacturing costing only 10% of the product price, because so many individual projects yield no exploitable product.

  • Accounting for R&D Activity

    • In the context of commerce, research and development normally refers to future-oriented, long-term activities in science or technology, using similar techniques to scientific research but directed toward desired outcomes and with broad forecasts of commercial yield.
    • A high technology company such as a computer manufacturer might spend 7%.
    • Although Allergan (a biotech company) tops the spending table with 43.4% investment, anything over 15% is remarkable and usually gains a reputation for being a high technology company.
    • The amount of costs applicable to the future cannot be measured with any high degree of precision

  • Inventory Turnover Ratio

    • A high turnover rate may conversely indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low.
    • The cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis.