Junk bonds

Definition

Junk bonds are high-yield, high-risk securities typically issued by companies with lower credit ratings. They offer higher returns to compensate for the increased risk of default.

5 Must Know Facts For Your Next Test

1. Junk bonds are rated below 'BBB' by Standard & Poor’s and 'Baa3' by Moody's.
2. They are also known as speculative-grade or high-yield bonds.
3. Investors demand higher interest rates on junk bonds due to the higher default risk.
4. Issuers of junk bonds often have weaker financial conditions or more volatile earnings.
5. Junk bonds can be used to finance leveraged buyouts, acquisitions, and other significant investments.

Review Questions

• What are the typical credit ratings for junk bonds by major rating agencies?
• Why do junk bonds offer higher yields compared to investment-grade bonds?
• For what purposes might a company issue junk bonds?

Related terms

Investment-Grade Bonds:

Bonds rated 'BBB' or higher by Standard & Poor’s or 'Baa3' or higher by Moody's, indicating lower risk of default.

Credit Rating:

An assessment of a borrower's creditworthiness, which affects the interest rate paid on its debt securities.

Default Risk:

The risk that an issuer will be unable to make principal and interest payments on its debt obligations.