Junk Bond

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DEFINITION of 'Junk Bond'

A colloquial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

BREAKING DOWN 'Junk Bond'

Junk bonds are risky investments, but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them. A junk bond issued from a company that manages to turn its performance around for the better and has its credit rating upgraded will generally have a substantial price appreciation.

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RELATED FAQS
  1. How are junk bonds rated differently by Standard & Poor's and Moody's?

    Standard & Poor’s and Moody’s give junk bonds lower credit ratings than investment grade bonds. Standard and Poor’s gives ... Read Full Answer >>
  2. What can cause a security to go from investment grade to "junk" grade?

    The most common reason for a debt security downgrade from investment grade to junk grade is a negative change in the bond ... Read Full Answer >>
  3. What role did junk bonds play in the financial crisis of 2007-08?

    Junk bonds were the at heart of the financial crisis of 2007-2008. Toxic assets related to the subprime housing market pushed ... Read Full Answer >>
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    Most bonds typically make periodic payments, known as coupon payments, to the bondholder. A bond's indenture, which will ... Read Full Answer >>
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