High-yield bonds are also known as which of the following?

• A. Investment-grade bonds
• B. Junk bonds
• C. Municipal bonds
• D. Government bonds

Answer: (B)

The idea being tested is that yield reflects credit risk. High-yield bonds are issued by entities with below-investment-grade credit quality, which means a higher default risk. To compensate investors for that risk, they offer higher yields, so they’re called junk bonds. Investment-grade bonds are the safer, higher-rated debt; municipal bonds are debt issued by municipalities (often with tax advantages); government bonds are sovereign debt. So the correct term for high-yield bonds is junk bonds.