High Yield Bonds, often referred to as "junk bonds," are bonds that carry a high risk of default and, as a result, offer a higher yield than investment grade bonds. A high yield bond is classified as having a rating of BB+ or lower, while bonds with rating of BBB or higher are known as investment grade. Debt instruments are the converse of equity instruments, or stocks, and generally perform better than equities during economic downturns. This generality holds because debt holders have the first claim on a company's assets. In recessionary periods when cash flows are short companies must pay their bond holders before their shareholders receive anything.
High yield bonds can be bought individually through a broker or in bulk through mutual funds. A high yield mutual fund is considered to be a safer way to invest in high yield instruments because the risk is spread over a larger number of contracts. That is, while any single bond within the fund may have a high probability of default, when many are grouped together the risk that all, or even most, of the bonds defaulting is much lower.
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