How is high yield debt typically structured?

High yield debt is typically structured as interest-only payments, allowing the issuer to focus on cash flow management during the life of the debt. This structure provides flexibility as the borrower can pay down the principal when cash flow allows, without the obligation to do so regularly. This characteristic is particularly beneficial for issuers, often lower-rated companies or those with riskier financial profiles, as it helps them manage liquidity and adapt to unpredictable cash flows associated with their business.

Having an interest-only structure enables high yield issuers to attract investors who accept higher risks for potentially higher returns, reflecting their need for a more manageable repayment schedule.

In contrast, the other options present structures that do not align with the typical characteristics of high yield debt. For instance, amortized debt over a fixed period requires regular repayments of both principal and interest, which might not be feasible for entities with uncertain revenues. The option involving repayment at maturity without any interim payments is more akin to certain types of bonds but does not capture the typical flexibility seen in high yield debt. Lastly, a structure that entails only principal payments without any interest obligation lacks practical application, as investors generally expect interest income to compensate for the risks they assume.