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Types of Bonds

Why Has the Market Grown?

Issuers whose bonds trade in the high-yield market include many household names in addition to many lesser-known companies. Although a few high-yield bonds are listed on the New York Stock Exchange, the vast majority of issues trade in the over-the-counter (OTC) market. Approximately 40 bond dealers actively “make markets” in high-yield bonds by offering to buy and sell bonds at quoted prices.

Why are high-yield bonds so popular today? For many issuers, high-yield bonds are a cost-saving alternative to borrowing money from banks. For investors, high-yield bonds have become more attractive in recent years due to a strong economy, as well as, because of the following trends:

New types of bonds The high-yield market has responded to investor needs by creating new types of issues, such as “step-up notes,” which pay a higher interest rate in later years. (See page 8 for descriptions of bond types.)

New packaged bond products such as collateralized bond obligations Collateralized bond obligations (CBOs) are innovative packages of bonds that are carved up into tiers, or “tranches,” with different maturity and/or credit quality characteristics. They are mainly sold to institutional investors.Standard & Poor's Ratings for High Yield Corporate Bond Issuance 2003

Rule 144A issuance In recent years, growing shares of new high-yield bonds have been issued under Rule 144A. The rule simplifies and expedites the sales of securities available for resale only to institutional buyers. Qualified mutual funds, pension plans, insurance companies and private money managers may purchase Rule 144A issues. In 2003, Rule 144A issues accounted for nearly 85% of new high-yield bonds coming to market. Most 144A issues come with registration rights and are able to register publicly within three to four months.

Increased quality of high-yield bonds Nearly 90% of today’s high-yield bonds are rated single-B or above. Because of this improvement in the quality of the high-yield market, the current period compares favorably with the more speculative era of the 1980s.


All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.