Junk bond

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Bonds are generally classified into two groups - "investment grade" bonds and "junk" bonds. A "junk bond" or high yield bond is one that is rated below investment grade when purchased. The credit rating of the companies issuing these bonds is relatively poor, meaning the bond issuer is more likely to default. Junk bonds have a higher risk of default than investment grade bonds, but they pay a higher yield to attract investors. The low credit ratings of the companies behind these bonds makes it difficult for them to acquire capital at an inexpensive cost. [1]

The term "junk" is reserved for all bonds with Standard & Poor's ratings below BBB and/or Moody's ratings below Baa. Investment grade bonds are generally legal for purchase by banks; junk bonds are not.[2]

References

  1. What Are Junk Bonds?. Morningstar.
  2. An Explanation of "Junk" Bond Ratings. Dow Publishing.