Junk bonds are high-yield bonds, which are rated below investment grade and investment in Junk bonds involve high risk. As these bonds are associated to interest risks, the bond value may be changed due to change in interest rates. Technically, junk bonds are similar to regular bonds and also the risk rate is relational to the bond's investment grade. According to characteristics of few bonds, they are termed as junk bonds. A proper credit analysis is necessary before investing in junk bonds or high-yield bonds; issuer's fundamentals should be properly scrutinized before investing in junk bonds. Popularity of junk bonds is uphill as typically lower -rated debt offering high yields.
According to investorwords.com, junk bonds may be defined as “A high-risk, non-investment-grade bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield. Opposite of investment-grade bond.”(http://www.investorwords.com/2686/junk_bond.html)
To have a clear idea about Junk bonds, it is prudent to have a clear overview about bond rating, two major bond rating scales offered by two well-known bond rating agencies are as follows:
Ratings like AAA, AA, A, BBB, BB, B, CCC, CC, C, with the additional rating D are given for debt already in arrears. Sometimes, government bonds are considered to be in a zero-risk category above AAA; and categories like AA and A can sometimes be fragmented into subdivisions like "AA-" or "AA+".
Junk bonds have similarities with equities in term of returns offered, equities have boomed and bust cycles and it is same in case of junk bonds. Junk bond investor should be ready for the stunning negative returns. Junk bonds can be categorized into two categories as follows:
Rising stars: These junk bond's ratings get increased as the credit quality of the issuing company improves.
Fallen angels: Many well performing bonds become junk bonds with the fall of the issuing authority's credit quality. Due to changing business conditions, credit quality of different organizations gets affected and the bonds issued by them become junk bonds.
Global issuances of junk bonds have considerably increased, as many investors are now eager to invest in high-yield bonds.
Though investment risks remain high, this debt instrument has been highly popular among the potential investors who want to make fast money.
According to investorwords.com, junk bonds may be defined as “A high-risk, non-investment-grade bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield. Opposite of investment-grade bond.”(http://www.investorwords.com/2686/junk_bond.html)
To have a clear idea about Junk bonds, it is prudent to have a clear overview about bond rating, two major bond rating scales offered by two well-known bond rating agencies are as follows:
Moody's |
Standard and Poor's |
Grade |
Risk |
Aaa |
AAA |
Investment |
Lowest risk |
Aa |
AA |
Investment |
Low risk |
A |
A |
Investment |
Low risk |
Baa |
BBB |
Investment |
Medium risk |
Ba,B |
BB, B |
Junk |
High risk |
Caa/Ca/C |
CCC/CC/C |
Junk |
Highest risk |
C |
D |
Junk |
Highest risk |
Ratings like AAA, AA, A, BBB, BB, B, CCC, CC, C, with the additional rating D are given for debt already in arrears. Sometimes, government bonds are considered to be in a zero-risk category above AAA; and categories like AA and A can sometimes be fragmented into subdivisions like "AA-" or "AA+".
Junk bonds have similarities with equities in term of returns offered, equities have boomed and bust cycles and it is same in case of junk bonds. Junk bond investor should be ready for the stunning negative returns. Junk bonds can be categorized into two categories as follows:
Rising stars: These junk bond's ratings get increased as the credit quality of the issuing company improves.
Fallen angels: Many well performing bonds become junk bonds with the fall of the issuing authority's credit quality. Due to changing business conditions, credit quality of different organizations gets affected and the bonds issued by them become junk bonds.
Global issuances of junk bonds have considerably increased, as many investors are now eager to invest in high-yield bonds.
Though investment risks remain high, this debt instrument has been highly popular among the potential investors who want to make fast money.
