Junk bond

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A junk bond is a risky, interest-bearing investment that pays a higher rate of return in order to compensate for the greater possibility of default (non-payment).

The credit rating of junk bonds is no better than "Ba" by Moody's Investors Service, or "BB" by Standard and Poor's.

These investments are called "junk" because some of the companies are on the brink of insolvency or bankruptcy. In the case of structured financing, the bonds may represent a basket of loans that are subordinated to other borrowing, so that they bear a disproportionate risk of default from otherwise ongoing companies. However, the higher yields paid by junk bonds provide compensation for that higher risk, and the investment may become a profitable one, particularly if the economy improves.

Junk bonds have been used to finance hostile takeovers, as in the takeover craze of the 1980s.