11 June, 2020

Quora Answer: Do High Yield Bonds Have a High Default Rate during a Recession?

The following is my answer to a Quora question: “Do high yield bonds have a high default rate during a recession?

Yes.  These bonds have a lower credit rating, meaning they are not investment grade bonds.  These bonds are not rated corporate papers, or sovereign bonds.  Their underlying issuer either has a weak financial position, or is already heavily leveraged.  To attract investors, they have to offer a higher yield.  Most such bonds are essentially junk bonds.  Let alone a recession, a high yield bond from a start-up might default simply because that start-up missed a fund-raising target.  These are not debt instruments for the faint-hearted, or those with liquidity exposure.

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