Junk Bond Market

The junk bond market is a type of market that deals in the buying and selling of junk bonds or high-yield bonds. Also termed as a speculative grade bond market, non-investment grade bond market, or high-yield bond market, it has no similarities with the majority of investment grade bond markets or bank loan markets.

A junk bond has a below investment grade rating at the time when it is bought. This kind of bond carries a greater risk of default and other financial adversities. Because of the higher risk level, junk bonds offer/yield greater interest rates to draw in investors and, although lacking in maintenance covenants, they do include incurrence covenants.

The junk bond market usually involves two types of risks:

• Credit risk: This type is associated with the probability that a default might occur (the borrower might not be able to make payments of principal and interest), and that after the default has taken place, the interest and principal remaining outstanding are not received. The risk is represented by a credit rating agency with an AAA (triple A) credit rating.
  
  
• Interest rate risk: This is associated with the change of a bond's value as a result of variations in the interest rate level or structure.

The junk bond market usually deals in the following types of bonds:

• Zero-coupon bonds ("zeros")
• Convertible bonds
• Multi-tranche bonds
• Deferred-interest bonds
• Extendable reset notes
• Floating-rate and increasing-rate notes
• Pay-in-kind bonds
• Straight cash bonds
• Split-coupon bonds

The leading credit rating agencies that perform the rating of junk bonds include the following:

• Fitch Ratings
• Moody's
• Standard and Poor's
• A.M. Best
• Dominion Bond Rating Service (DBRS)

The different indices, commonly known as high yield or junk bond indices, are as follows:

• The Merrill Lynch High Yield Master II
• The CSFB High Yield II Index or CSHY
• Bear Stearns High Yield Index or BSIX