High Yield Bonds

D

High yield bonds, also known as junk bonds, are bonds that have a lower credit rating and higher risk of default compared to investment-grade bonds. These bonds are issued by companies or entities with lower creditworthiness, which means they have a higher chance of defaulting on their debt payments.

Option A states that high yield bonds pay a lower coupon rate than investment-grade bonds. This statement is correct. Due to the higher risk associated with high yield bonds, investors require a higher yield to compensate for the increased possibility of default. Therefore, high yield bonds typically offer higher coupon rates or yields compared to investment-grade bonds.

Option B states that high yield bonds have a lower probability of default than junk bonds. This statement is incorrect. High yield bonds and junk bonds refer to the same category of bonds. Both terms are used interchangeably to describe bonds with lower credit ratings and higher default risk. So, high yield bonds and junk bonds have a higher probability of default compared to investment-grade bonds.

Option C states that high yield bonds are avoided by institutional investors. This statement is incorrect. While it is true that institutional investors, such as pension funds and insurance companies, often have stricter investment guidelines and may prefer investment-grade bonds, it is not accurate to say that they completely avoid high yield bonds. Many institutional investors allocate a portion of their portfolio to high yield bonds to seek higher yields and diversify their investment holdings.

Based on the explanations above, the correct answer to the question is D. None of these.