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1.4. Credit Spread of Junk Bonds

Credit spread is the difference in yield between a corporate bond and a government bond at each point of maturity. As such, the credit spread reflects the extra compensation investors receive for bearing credit risk.
So, the total yield on a corporate bond is a function of both the treasury yield and the credit spread, which is greater for lower-rated bonds.

1.5. Risks Involved in Junk Bonds

There are four main kinds of risks involved with junk bonds: -

1.5.1. Default Risk / Credit Risk

The credit risk of a high yield bond refers to the probability of a default (i.e., debtor unable to meet interest and principal obligations) combined with the probability of not receiving principal and interest in arrears after a default.

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* Contributed by -
Neha Agarwal & Padmakar Kulkarni,
PGDIM - XI,
NITIE, Mumbai.