High-yield bonds are also referred to as junk bonds due to their lower status than typical corporate and government bonds. Bonds issued with high yields tend to come from start-up businesses or those that require a lot of investment. They have lower credit ratings and are more likely to default, which is when a bond issuer fails to repay the debt or financial obligation that has been agreed between parties.
Therefore, junk bonds tend to pay higher interest rates to investors in order to compensate for this risk. High-yield bonds can be classified into two categories, depending on their current status: