Junk Bond

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Related to Junk bonds: High yield bonds

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 ?
Therefore, if money market interest rates are zero, and junk bonds now also trade at close to zero, the risk premium has become compressed, has become very small, insufficient to compensate the investor when a correction happens.
Junk bonds are less susceptible to rising interest rates than most other bond funds, but they're still bond funds, and when interest rates rise, bond prices fall.
Investors' thirst for a good return--known as the "search for yield"--has caused absolute borrowing costs to fall to almost unheard of levels for junk bond issuers (although the "spread"--the difference between the yield and a supposed risk-free rate such as US Treasury bonds--has remained relatively high).
The scrubbing of the junk bond sale was first reported by Reuters in New York, citing the high-yield research firm KDP Investment Advisors.
The action also resolves allegations that Credit Lyonnais intentionally misrepresented to the Federal Reserve the extent of its ownership interests in a portfolio of junk bonds that had been acquired from Executive Life, as well as its substantial equity investment and other relationships with Artemis, S.A., a French company that subsequently acquired the successor insurance company and junk bond portfolio.
parents quarreling, masks (tainted by association with Halloween), life on other planets (if the implication of evolution can be made), blizzards, hunting, gangs, ghosts, junk bonds, Christmas (or other religious holiday celebrations), abortion.
Given the current state of the markets, Reed has reduced the company's reliance on stocks and corporate bonds in favor of less conventional and riskier alternatives such as junk bonds, emerging markets, real estate investment trusts and the slick science of arbitrage.
The price of a share of Kraft stock rose with the news, possibly indicating that Wall Street traders favor junk food as much as junk bonds.
Q What are "junk bonds", are they risky - and should I be investing in them?
The ratings on Mitsubishi Motors represent junk status as bonds with ratings of BB or lower are considered junk bonds.
Credit rating agency Moody's Investors Service has now slashed its rating on the bonds from A3 - for investments with only modest risk - to BAA3, which is just one notch above junk bonds.
turned finance whiz, Ackerman spent the late 1970s and 1980s at Drexel Burnham Lambert's Los Angeles office working with his colleague Michael Milken on popularizing junk bonds. Not surprisingly, the center's offices look less like a scruffy, under-funded human rights organization than a successful hedge fund, with new computers sporting flat-screen monitors and a gourmet coffee machine in the kitchen.