Junk Bond

(redirected from high-yield bond)
Also found in: Dictionary, Thesaurus, Medical, Financial, Encyclopedia, Wikipedia.
Related to high-yield bond: junk bond

Junk Bond

A security issued by a corporation that is considered to offer a high risk to bondholders.

Junk bond is the popular name for high-risk bonds offered by corporations. A bond is a certificate or some other evidence of a debt. In the world of corporate finance, a corporation may sell a bond in exchange for cash. The bond contains a promise to repay its purchaser at a certain rate of return, called a yield. A bond is not an Equity investment in the corporation; it is debt of the corporation.

A corporate bond is essentially a loan to a corporation. The loan may be secured by a lien or mortgage on the corporation's property as security for repayment.

To determine the level of the default risk for potential bondholders, financial experts analyze corporations and rate them on a number of factors, including the nature of their business, their financial holdings, their employees, and the length of their existence. The higher the risk for bondholders, the lower the risk rating given the corporation.

Because their ventures are considered risky, low-rated corporations must offer bond yields that are higher than those of high-rated corporations. High-rated corporations have less need for income from bonds, so they do not need to offer high yields. Bonds from these companies are called investment-grade bonds. Low-rated corporations have the need for bond income, so they offer high-yield bonds. These high-yield bonds are junk bonds.

When a corporation fails, bondholders may lose all or part of their investment if the corporation has declared Bankruptcy or has no assets. This possibility is more real for junk bonds because they are, by definition, issued by unproven or unhealthy corporations.

For some persons, the high yield of a junk bond can be worth the increased risk of default. Junk bonds can increase in value if the corporation's rating is upgraded by private bond-rating firms. Junk bonds are also favored by some persons precisely because they contribute capital to young or struggling corporations. Whether to buy a junk bond depends on the investor: conservative investors do not favor them, but speculators and others seeking a quick profit find them attractive.

Further readings

Boyer, Allen. 1989. "For the Love of Money." Georgia Law Review 23.

References in periodicals archive ?
Despite hiccups, high-yield bond funds as a group continue to chug along.
But now that yields have fallen again, being a high-yield bond manager is like being a bargain-hunter at Prada.
The diversification provided by both high-yield bond and senior loan index ETFs helps to mitigate issuer-specific risk; however, diversification alone is insufficient for managing the credit risk to which investors in these ETFs are exposed.
According to market figures, HSBC Holdings is the 14th most-active underwriter of high-yield bond sales in the US this year and has bettered its position by one level.
SEI Capital Markets Research, 1994, High-Yield Bond Investments for U.
Last year, the combined, weighted, after-tax yield of this portfolio of municipals, government, and high-yield bonds would have been 6.
Unlike the public shareholders, management foregoes the cash and high-yield bond portion of the package and, instead, receives the $24 in value by receiving six stub shares at $4 each.
High-yield bonds are not suitable for all investors and the risks of these bonds should be weighed against the potential rewards.
As for high-yield bonds in the short run, they are fairly valued compared with where they were in January 2014, when they "were the most overvalued in history," the CEO says.
By historical standards, that's high" According to the Merrill Lynch High-Yield Master Index, the average high-yield bond yielded 10.
Richards has more than 26 years of investment experience, including 20 years managing high-yield bond portfolios.
M2 EQUITYBITES-October 10, 2014--RBC Global Asset Management re-opens high-yield bond fund