High Yield Bonds are the bonds for which the rate of interest offered are higher. The risk of credit associated with this type of bond is generally higher and is rated by the grading agencies as speculative in nature. They also consider this asset type to be below the level of investment because it is not evident that in the long run or for a specified time period this locked money would appreciate.
It has been observed that the agencies which attribute credit ratings to the different types of bonds generally allocate either a BB or lower rate to the High Yield Bonds. This signifies that the chances of default in case of the High Yield Bonds are higher and are thus placed in the Speculative Grade zone. Thus, the meaning of this is that the probability of default in case of High Yield Bonds is much higher than the other category of bonds available in the market. So, the issuers of the High Yield Bonds have to offer a good package for enticing the investors in its fold.
Generally, it has been observed that the bonds having a good rating of credit possess less yield. Thus with the falling of the credit rating of a bond, the rate of interests offered by the issuing company increases. In this case the holders demand more compensation package from the issuer for holding the High Yield Bonds.
As these type of bonds are more exposed to the risk of default, so the real sense investors don't generally put these High Yield Bonds in their portfolio of investment. They generally shy off from these bonds because this pose a greater threat to their portfolio of investment as this increases their exposure to depletion of fund in the investment portfolio.
The recent developments in the risk management techniques has led to the revelation that the compensatory packages given by the bond issuing companies are much higher than the actual risk of default. This led to the creation of those type of underwriters who started to issue High Yield Bonds in the market. With the highly modern risk adjustment techniques in hand, the investors, mainly the Asset Management Companies are preferring to invest their large chunk of funds in this High Yield Bonds.