What Are Junk Bonds?

What are Junk Bonds?  Junk bonds usually referred to more respectfully as “high-yield bonds” or “speculative bonds” are bonds with a lower credit rating.  All bonds are issued credit ratings relative to their bond issuer’s credit worthiness.   The credit worthiness of a bond issuer functions very much the same as a person’s personal credit rating; however these credit ratings are assigned letters.  The major managers of credit ratings for bond issuers consists in the United States primarily of  Standard and Poor’s, Moody’s, Fitch Ratings, Dominion Bond Rating Service and A.M. Best.  These credit analysts evaluate bond issuers, even national governments, and assign ratings from AAA, the best, down to C.  Any bond issuer who has a credit rating of less than BBB- is determined to be issuing so called junk bonds.  These high-yield bonds however are not all bad, in fact they offer on average 3-4% or more interest rate points in coupon rates over the highest credit rated bond issuers such as the US Government.

High-Yield Bonds: Risk Vs. Potential

High-yield bonds are considered speculative bonds because those investing them are taking a risk on a sub-standard bond issuer in exchange for profits from higher interest rates.  Speculative bonds have surged in recent years in investment reaching over $146 billion in 2003.  While not considered a safe investment when compared to a low risk bond, high-yield bonds can and have made many investors and funds very much money.  Most speculative bonds are issued by corporations and used to infuse capital into operations or fund mergers and acquisitions.  In this way speculative bonds can and do pay out when their risky ventures materialize into corporate profits.  Speculative bonds can be normal bonds that are then downgraded, or can simply be high-yield bonds from their initial issuance.  In most cases a government bond will not be considered a junk bond however in light of the financial crisis of 2008-2009 it has occurred with Greece and potentially will affect others nations in the future.

Related posts:

1. What Are High Yield Bonds?
2. What Are Eurobonds?
3. What Are Callable Bonds?
4. What Are Bonds Investments?
5. What Is The Bond Rate?