Below-investment-grade
Investment Banking glossary · Investment Banking Valuation
Definition
High Yield Bonds (a.k.a. junk bonds, speculative-grade bonds) — unsecured debt rated below BBB- (S&P) / Baa3 (Moody's). Carry higher coupons (5–10%+) than investment-grade debt to compensate for elevated default risk; use incurrence covenants (tested only when the issuer takes an action) rather than maintenance covenants; and feature explicit call protection (non-call periods plus declining call premiums).
Below-investment-grade in plain English
When a company borrows money by issuing bonds, rating agencies grade how likely it is to pay the money back, and anything below a certain safety line (BBB- or Baa3) is considered risky — nicknamed "junk" or high-yield debt. Because lenders are taking a bigger gamble that they might not be repaid, these bonds pay higher interest, often 5–10% or more, to make the risk worth it. It's like a bank charging a higher rate to a borrower with a shaky credit score. These bonds also come with looser day-to-day rules for the borrower but special protections for lenders, like set periods where the company can't pay the debt off early and must pay a premium if it does.
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