Junk Bond

Financial Dictionary -> Investing -> Junk Bond

A junk bond is a bond that is rated below the investment grade before the purchase. It may also be known as a high yielding bond, non investment grade bond or speculative grade bond. To make them more attractive to investors, junk bonds pay higher yields, however they are much more likely to default. The rating of a bond is determined by the credit rating of the borrower. In today's economy bonds are traded in the same fashion as other commodities.

In the United States, rating agencies like Fitch, Standard & Poor's and Moody's use a rating system of AAA, AA, A, BBB, BB, B, CCC, CC, C, D. Anything below a BB rating is usually considered to be a junk bond and carries a high credit risk.

Investment companies and single investors aim to maximize their profits by balancing the security of an investment with the cost of the bond in the market place. Junk bonds are attractive to some investors because of their low cost, but it doesn't always work out well.

Before the 80s, junk bonds mostly came about from a decrease in the credit rating of former investment grade issuers. This happened because of a major change in business conditions, or the assumption of too much financial risk by the issuer. These issues were commonly called "fallen angels".