High Yield Corporate Bonds

Credit rating agencies such as Standard & Poor’s and Moody’s have created a grading system to reflect the relative credit quality of bond issuers. The highest quality bonds are "AAA" rated and descends to "D" rated bonds that are in default. Bonds "BB" and lower are termed "speculative grade" and have a higher risk of default than investment grade bonds, rated “BBB” and higher. Higher credit risk requires higher bond yields than that demanded of investment grade bonds. With the advent of modern portfolio theory, financial researchers have begun to observe that the "risk-adjusted" returns for portfolios of speculative grade bonds were relatively high. It became apparent that the credit risk of these bonds was more than compensated for by the higher yields.

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