High Yield / Non-Investment Grade

What is High Yield/Non-Investment Grade?

A high yield debt security pays a high return to compensate for the larger counterparty risk associated with the investment. Counterparty risk (risk of loss due to the default of a counterparty) can be measured and rated. The main rating agencies (Standard & Poor's, Fitch, Moody's) evaluate issuers' ability to repay their debts, i.e., to repay the right amounts on the right dates, and assign them a corresponding rating.

Higher quality bond issuers (AAA to BBB-) are considered investment-grade or good quality. Issuers with a rating of BB+ to below are seen as riskier, and they are typically referred to as Non-Investment Grade, Speculative Grade or High Yield. From the investor’s point of view, High-Yield Bonds can be attractive because of the higher expected return compared with securities with low counterparty risk.