What Are Junk Bonds?

 

The banking industry has set basic standards and categories for measuring risk. What is the definition of a junk bond?

“Investment Grade Versus Junk Grade Bonds”

Credit rating agencies – such as Moody’s and Standard & Poor’s – will conduct an objective assessment of a corporations’ likelihood of repaying its debt to assign it a credit rating. There are many levels to this scale including the difference between investment-grade and non-investment grade. For Moody’s, anything under “Ba” is non-investment grade; for Standard & Poor’s, anything under “BB” is non-investment grade.

The word – “junk” – actually refers to a corporate bond being “non-investment grade.” The junk bond can serve as a warning that something in the company’s balance sheet does not satisfy common credit industry accounting norms. The “junk bond” is considered to be a high-risk, high-reward investment vehicle according to Marc Sparks.

For some investors, this “high-yield” non-investment grade brand is an attractive opportunity to increase profits. Some of these junk bonds might be repackaged into Collateralized Debt Obligations (CDOs) or Collateralized Loan Obligations (CLOs).

One thought on “What Are Junk Bonds?

  1. Speculators, especially hedge funds, might believe the company can turn its economic fortunes around. Corporations are rated based on their likelihood of repayment. It is very good for them to help with assignment that is very difficult and save our ass in the process.

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