Junk Bond


Also found in: Dictionary, Thesaurus, Financial, Idioms, Encyclopedia, Wikipedia.
Related to Junk Bond: Investment grade 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.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
References in periodicals archive ?
If S&P decides to lop off that third B off EDS' credit rating, the service giant would be in junk bond territory.
"The junk bond market is very hot right now, with investors pouring in a lot of cash based on the strong returns," observed Joel Friedman, director at Standard & Poor's in New York.
Our sample exclusively covers original issue high-yield bonds issued during the boom years of the junk bond market and follows them for a sufficient period past the issuance to determine the fate of virtually all bonds.
The results for the Charge event suggest that, unlike at the time of the Investigation, market participants expected that retail customers would respond to the Charge announcement and withdraw business from insurers with junk bond holdings.
Milken, the former junk bond king, spent two years in federal prison and paid $600 million in fines after pleading guilty to securities fraud, mail fraud, and conspiracy.
Milken, the "junk bond king" who became a symbol of the decade's greed when he was sentenced to prison for securities fraud.
With changes in the market worldwide, there's a risk in the junk bond market that hasn't been there for five years, says Garner.
In a recent paper, indications of significant year-end effects in junk bond prices were also provided by Cooper and Shulman (1994).
junk bond king Michael Milken has decided that wealth is a byproduct of creating something of value, as he told the New York Times.
The district court granted summary judgment in favor of all the defendants, holding the junk bond prospectus fully disclosed the risks of investing in WOW; even if the 1987 financial statements were false or misleading, all the defendants had established affirmative defences to section 11 liability.
allegedly in return for Executive Life's junk bond financing of the Pacific Lumber takeover.
Junk bonds in America, have been favourite field for fraudulent activities and a few white collared criminal like Miachel Milken and Ivan Bovesky have been jailed for their foul deeds in junk bond operations.