What are the meanings and characteristics of high-yield bonds? 1. The significance of high-yield bonds
Internationally, high-yield bonds refer to bonds with lower credit rating than investment grade, so they are also called junk bonds or speculative bonds. According to the credit rating classification of bonds by international rating agencies (Standard & Poor's, Moody's and Fitch), high-yield bonds are bonds lower than Baa or BBB. Sometimes, high-yield bonds also include those that are not rated. High-yield bonds can generally bring investors higher returns than investment-grade bonds. The issuers of such bonds are usually those enterprises that are developing rapidly but lack cash flow, enterprises with high debts, or investors who make leveraged buyouts.
Category Credit Rating Moody's Standard & Poor's/Fitch Interpretation
Investment grade bonds have the highest credit rating, AaaAAA, and there is basically no default risk.
AaAA has high quality and low default risk.
High credit AA has high quality and low risk, but there may be problems.
BaaBBB is of medium quality, and it is not a big problem now, and there may be problems in the future.
The speculation of high-yield bonds has a certain speculative component, which will have great problems in the long run.
BB can pay interest now, but the risk of default is higher.
The credit is very low, the quality of CaaCCC is poor, and the possibility of default is high.
CaCC is speculative and may be in default.
At the lowest level of CC, it is basically impossible to repay all debts.
DD has defaulted.
The trading of high-yield bonds and junk bonds is mainly based on their credit rather than interest rates. There is a view that junk bonds and high-yield bonds have important differences. Both can produce high returns. The high yield of junk bonds reflects the issuer's poor credit rating, while the yield of many high-yield bonds reflects other situations such as the small size of the company or the lack of credit history information of the company. Although rating agencies often give such companies a low credit rating, they show good credit in many aspects. This difference is exactly what credit analysts have to face.
2. The characteristics of high-yield bonds
Compared with investment-grade bonds, high-yield bonds have the following characteristics:
high-production
The default risk of high-yield bonds refers to the possibility that the issuer cannot repay the principal and interest due to operational or financial problems. Generally speaking, if the bond issuer's ability to repay debts weakens, the default risk of bonds will increase and its market value will decrease accordingly. Therefore, the issuer of high-yield bonds should compensate investors according to the default risk of bonds. High-yield bonds can provide investors with higher interest income and potential capital appreciation than national debt or high-credit corporate bonds. Due to the low credit rating of high-yield bonds, in order to attract investors, generally speaking, its coupon rate is higher than that of high-credit bonds. Historically, the average yield of high-yield bonds is 400-500BP higher than that of US Treasury bonds with the same maturity. On the other hand, when the economic boom rises, the industry develops well, and the issuer's performance or credit rating improves, investors in high-yield bonds can also get opportunities for capital appreciation. For example, during the period of 2002 -2004, due to the steady growth of American economy, corporate debt ratio and credit default rate decreased, and the credit premium of high-yield bonds fell from a high of 200 1 to a historical low at the end of 2004, which brought considerable capital gains to high-yield bond investors. In 2002-2004, the yield of high-yield bonds exceeded double digits. In addition, for high-yield bonds linked to bonds and stocks, investors have stock options, and when mergers and acquisitions occur, they may get a lot of income. In addition, good news, such as company merger or merger, product innovation, and the successful appearance of high-yield bond issuers, are all potential factors that can bring benefits to bondholders.
Generally speaking, high-yield bonds have low correlation with other types of fixed-income markets, which can improve the diversification of fixed-income assets. Some studies show that, historically, the diversified portfolio of high-yield bonds has generated more income than credit risk. The reasons are as follows: first, the issuer of corporate bonds defaulted less than expected; Second, these bonds provide higher yields. The actual low default rate of high-yield bonds and the high interest difference with national debt make them produce above-average returns. This is also confirmed in some empirical studies on the diversified portfolio of high-yield bonds. Hickmann once found through research that the market performance of low-grade bonds is better than that of high-grade bonds at all stages of an industry life cycle. According to traditional analysis, the difference of bond returns is rooted in the difference of default risk. The greater the volatility of bond investment, the greater the risk. Bonds give investors corresponding compensation according to the risk level. Hickmann calculated the risk compensation of various bonds to investors, and found that the risk premium of low-grade high-yield bonds exceeded their actual default risk. In other words, even considering the risk compensation factor, the yield of high-yield bonds is still higher than that of investment-grade bonds. Many studies show that, in the long run, high-yield bonds perform better than high-credit corporate bonds and government bonds, but less than common stocks.
In addition, the price of high-yield bonds changes more with the change of credit status (non-market risk) than with the fluctuation of interest rate level (market risk), and high-yield bonds are less affected by the risk of interest rate fluctuation. The market price of fixed-rate bonds often changes because of the fluctuation of market interest rate, and the rise of market interest rate will lead to the decline of bond market price. The issuance period of American high-yield bonds is usually within 5- 10 years, and it is generally stipulated that the debt can be repaid after 4 or 5 years of issuance, so the interest rate risk is less than that of long-term bonds.
High credit risk
High-yield bonds correspond to high credit risk. Undoubtedly, the default rate of high-yield bonds is higher than that of investment-grade bonds. Changes in the economic cycle, excessive leverage or threats from competitors may all lead to bankruptcy or restructuring of enterprises, thus making bonds default. Moody's data shows that during the period of 1994-2007, the default rates of BB-grade, B-grade and C-grade bonds were 3.43%, 5.34% and 12.57% respectively, which were significantly higher than those of investment-grade bonds, and the lower the credit rating, the higher the default rate.
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