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 ?
Included in the high-yield bond funding may be zero-coupon bonds or their close relative, payment-in-kind (PIK) securities.
But purchasing high-yield bonds will increase the risk/reward mix of your portfolio.
Another test, however, strongly indicates that from the investor's standpoint, there is a sizable equity component in a nonconvertible high-yield bond.
HSBC Holdings (LSE: HSBA) has announced that it has hired a head for its high-yield bond sales in the US.
There are 21 dealers providing liquidity for high-yield bonds on Tradeweb's credit platform, which was launched in June 2006.
According to Standard & Poor's, high-yield bond fund performance has been aided by the low interest rate environment in 2003, investors continuing to remain cautious with respect to equity investments, and the lower number of corporate defaults.
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.
All 354 high-yield bond funds tracked by Standard & Poor's ended the period in the black.
According to Moran, these changes have been made to accommodate the continued growth of DLJ's market share in the resurgent high-yield bond market.
Neuberger Berman High Income Fund ("the Fund"), led since October 2005 by portfolio managers Ann Benjamin and Tom O'Reilly, has generated annualized returns substantially ahead of the high-yield bond category average over the past five years through January 31, 2012, according to fund tracker Morningstar Inc.