Economists look for signs of the economy's current and future performance in the bond market. The spread in the yields between junk bonds and default-free Treasury securities may prove useful in predicting economic performance.

That's because junk bonds are issued by firms with marginal credit quality that are more vulnerable to changes in economic conditions than investment-grade borrowers. Junk bonds are also called high-yield bonds because they carry significantly higher interest rates to compensate investors for bearing the higher risk that is inherent in these bonds:

1. How do you define the two key components-of the junk bond yield? Define and briefly discuss the two main risk components-of the junk bond yield?

2. What do the terms credit watch and ratings outlook mean to you? Briefly discuss and present your opinions?