Investment Grade vs High Yield Corporate Bonds

An example of corporate bonds is an investment grade corporate bond. Another example of corporate bonds is a high yield corporate bond. Below is a comparison between investment grade corporate bonds vs high yield corporate bonds.

Investment Grade bonds vs. High Yield Bonds

Most corporate bonds are characterized as either investment grade corporate bonds or high yield investments.

The primary differences between the two are their assigned credit quality corporate bond ratings and levels of return.

Investment Grade Corporate Bonds

Investment Grade Corporate Bonds provide a quality investment vehicle for more conservative fixed income investors.

To be considered “investment grade” corporate bonds, a corporate bond issue must be rated Baa3/BBB- or higher by Moody’s ratings and/or Standard & Poor’s (S&P ratings), respectively.

These corporate bonds generally provide the highest degree of principal and interest payment protection and are the least likely to default.

High Yield Corporate Bonds

In the 1980s, high yield corporate bonds or “junk” bonds were primarily issued to finance takeovers and restructurings of larger companies through leveraged buyouts (LBOs).

However, today’s high yield corporate bonds are most often issued by manufacturing, media and telecommunications companies to raise capital for business expansion and technological advancement.

These corporate bonds reward more risk tolerant investors (willing to accept large degrees of credit risk) with the possibility of substantially higher yields.

Unlike investment grade corporate bonds, the risk of default (and loss of principal and interest) is significantly greater with a high yield corporate bonds. That is why high yield corporate bonds are recommended only for more aggressive investors.