Fixed income instruments that are referred to as high-yield bonds or junk bonds are a well-defined subset of the bond market. The total value of outstanding bonds in the global market amounted to $95 trillion in 2010. These assets are similar to other bonds, in that they represent an investment in the debt of an entity. Investors lend money to entities that require additional capital, with the intent of earning money (interest) while the funds are on loan. At the maturity of the loan, the investor collects the invested amount (principal). Depending on the economic outlook, business environment and other unique circumstances; a company may face difficulties to pay the interest payments or the final repayment of the principal. This quality of the company is called its credit worthiness. The risk that it will fail to make one or more of these payments is called credit risk. Institutional investors keep fixed-income analysts employed to analyze the factors influencing the credit worthiness of a company. Individuals and smaller investment shops cannot afford to hire such specialized staff. Without insights to the credit risk of a company, investing in bonds would be very much like gambling. To raise more capital (or the same amount for less interest), issuers can increase the size of the investor pool (simple supply/demand dynamic). In order to address the handicap of smaller investors, they can hire credit rating agencies to rate their bonds. The three major credit rating agencies in the United States are Standard & Poor's, Moody's and Fitch Ratings. Upon conducting their analysis, the agencies assign a rating to the issued bonds. These ratings represent how likely it is that the issuer will default on its obligations to pay.

S&P Moodys Fitch Description
A_AA A_aa A_AA Investment Grade
AA+ Aa1 AA+
AA Aa2 AA
AA- Aa3 AA-
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High yield / junk bonds
BB Ba2 BB
B+ B1 B+
B B B
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D - Defaulted

The table above shows the equivalent ratings of the three agencies and the portion of the scale that defines high-yield bonds. Since junk bonds represent the bottom end of the scale, issuers whose debt is rated in this region have to pay a high price for the money they borrow in order to compensate the investors for the risk that they might not get all the payments initially set out in the prospectus. The return promised on a bond is also called yield. It is therefore now easy to see why high-yield bonds are called what they are.