TAILIEUCHUNG - HIGH-YIELD BOND MARKET PRIMER

But what happens if interest rates unexpectedly rise by a significant amount, say 4 percentage points across the yield curve? Such a move has happened only twice in the United States, once in 1980 and again in 1981, as the Federal Reserve drove interest rates higher in an effort to combat high inflation. But in relative terms, if interest rates jumped from to , that rise would constitute a 140% change in rates—a change that has never occurred in the United States, and one that would be truly significant. Figure 1 demonstrates the hypothetical impact of a 400-basis-point increase in interest rates on an investment linked to the broad . bond. | Introduction High-yield bonds are debt securities issued by corporations with lower-than-investment grade ratings. The issuing companies usually are seeking money for growth via M A perhaps working capital or other cash flow purposes. The non-investment grade ratings - lower than BBB- by Standard Poor s Baa2 by Moody s and BBB- by Fitch - suggest a higher chance of an issuer default wherein the company does not pay coupon interest or the principal amount due at maturity in a timely manner. Thus these companies must offer a higher interest rate - and in some cases additional investor-friendly structural features - to compensate for bondholder risk and to attract buying interest. Other terms for high-yield such as speculative-grade and junk bond have given the asset class some negative connotation over the years but high-yield has matured into a solid 20 of the overall corporate bond market which itself is estimated at roughly 5 trillion larger than both the . Treasury market 4 trillion outstanding or the municipal bond market 2 trillion outstanding according to Bond Market Association estimates. Issuance High-yield bond issuance usually entails three steps Investment bankers draft the offering proposal and negotiate conditions with potential investors Once terms are finalized the securities are allocated to bondholders Soon the bonds are available for purchase and sale in the aftermarket or secondary via broker dealers There are a variety of bond structures across the landscape of high-yield but two characteristics are constant Coupon or the rate of interest the entity pays the bondholder annually Maturity when the full principle amount of the bond issue is due to bondholders Background Corporate bonds have been around for centuries but growth of the non-investment-grade market did not begin until the 1970s. At this time the market was composed primarily of companies that had been downgraded for various reasons from investment-grade becoming fallen angels and .

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