Lesson 6 of 6 · 14 min
Long-term debt: investment-grade vs high-yield issuers
Investment-grade issuers borrow long term almost on their own terms, while high-yield issuers pay a large issuer-specific spread and accept covenants, security, shorter maturities and patchy market access.
In short
- Long-term debt gives more stable funding for short-term activities and long-term needs such as capital investment.
- Normally, longer maturities mean higher benchmark yields and higher credit spreads for the same issuer.
- Maturity trade-offs: an investor buying beyond its horizon takes price risk (and faces reinvestment risk); an issuer funding a long project with short debt takes rollover risk. HY spreads make these trade-offs costlier.
- IG: most of the YTM is the benchmark yield, bond-like cash flows, few covenants, unsecured, maturities up to ~30 years, staggered maturities, opportunistic issuance.
- HY: more of the YTM is issuer-specific spread, equity-like cash flows, covenants and security, maturities ≤ 10 years, cyclical access, frequent use of callable bonds and leveraged loans.
- Fallen angels: HY credit risk but IG-style bonds (non-callable, few covenants, long maturities); forced selling by IG investors can push prices down sharply.
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