What Is A Junk Bond?

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

A junk bond is a high-risk bond that is rated BB or lower by one of the main ratings agencies. There is a reasonably high risk that the issuer of the bond will default on the payments, hence the low rating. Junk bonds usually pay a high rate of interest.

There are two reasons for purchasing junk bonds. The first option is for speculation purposes, going on the assumption that the issuer is more credit-worthy than they are being given credit for and that they will actually meet the high payments.

The other strategy is to purchase a large amount of diverse junk bonds and assume that only a few will default, but that the high return by the ones which succeed will more than outweigh the defaulting ones.

Junk bonds became very popular in the 1980s through the work of Drexel Burnham Lambert and Michael Milken.

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Patrick Curtis

Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis. This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.