What Is A Junk Bond?

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.

To learn more about this concept and become a master at bonds and fixed income, you should check out our Bond Course - Fixed Income (coming soon!).

 

Related Terms

Return to Finance Dictionary

 

 

Start Discussion

Total Avg Compensation

September 2020 Investment Banking

  • Director/MD (17) $704
  • Vice President (46) $325
  • Associates (258) $228
  • 3rd+ Year Analyst (37) $203
  • 2nd Year Analyst (144) $154
  • Intern/Summer Associate (135) $141
  • 1st Year Analyst (568) $129
  • Intern/Summer Analyst (548) $82

Leaderboard See all

1
LonLonMilk's picture
LonLonMilk
98.3
2
Jamoldo's picture
Jamoldo
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.8
5
redever's picture
redever
97.7
6
Addinator's picture
Addinator
97.6
7
Edifice's picture
Edifice
97.6
8
frgna's picture
frgna
97.5
9
NuckFuts's picture
NuckFuts
97.5
10
bolo up's picture
bolo up
97.4