What are Junk Bonds?


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Junk Bonds

A junk bond is issued by a corporation or municipality with a bad credit rating. In exchange for the risk of lending money to a bond issuer with bad credit, the issuer pays the investor a higher interest rate. “High-yield bond” is a nicer name for junk bond The credit rating of a high yield bond is considered “speculative” grade or below “investment grade”. This means that the chance of default with high yield bonds is higher than for other bonds. Their higher credit risk means that “junk” bond yields are higher than bonds of better credit quality. Studies have demonstrated that portfolios of high yield bonds have higher returns than other bond portfolios, suggesting that the higher yields more than compensate for their additional default risk.

Junk bonds became a common means for raising business capital in the 1980s, when they were used to help finance the purchase of companies, especially by leveraged buyouts, the sale of junk bonds continued to be used in the 1990s to generate capital


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