High-yield bond
A high-yield bond is a bond rated below investment grade, informally a junk bond, paying a higher coupon and yield than safer bonds to compensate investors for greater default risk.
What it is
See it move
A high-yield bond with a 6% coupon currently yields 9%, while a comparable-maturity government bond yields 3%. The credit spread is 9% − 3% = 6 percentage points, or 600 basis points — the extra return investors demand for the bond's greater default risk over the safe benchmark.
The formula
Variables
- Credit spread (%)
- Yield to maturity on the bond (%)
- Yield on the risk-free benchmark (%)
Measures the extra yield a bond offers over a safe benchmark of similar maturity as compensation for default risk.
Check yourself
A high-yield bond issued by a mid-sized manufacturer has a 6% coupon and currently yields 7.5% to maturity. A comparable-maturity euro-area government bond yields 2.5%. What is the credit spread, in basis points?