What are high yield bonds?
All bonds are debt instruments issued by organizations to raise capital for various purposes. When you buy a bond, you are borrowing your money to the company that issues it. In return for the loan of your funds, the issuer agrees to pay you interest and eventually repay the principal (principal) when the loan is due or on a specific date in the future known as the "Due Date" or "Call Date".
High yield bonds are issued by companies that are not qualified for investment grade ratings by any of the leading rating agencies - Moody's Investors Service, Standard & Poor's Ratings Services, and Fitch Ratings. Rating agencies rate issuers and assign ratings based on their opinions about the issuer's ability to pay interest and principal as planned. Those issuers that have a higher risk of default and do not pay interest or capital in a timely manner are classified below investment grade.
These issuers have to pay higher interest rates to encourage investors to buy their bonds and to compensate them for the risks associated with investing in companies with lower credit quality. Organizations that issue high yield debt include many different types of US companies, certain US banks.