What is the junk bond market?
A junk bond is debt, known as a corporate bond, issued by a company that does not have an investment-grade credit rating. Junk bonds are also known as high-yield bonds because the interest payments are higher than for the average corporate bond.
How do junk bonds work?
Like any bond, a junk bond is an investment in debt. A company or a government raises a sum of money by issuing IOUs stating the amount it is borrowing (the principal), the date it will return your money (maturity date), and the interest rate (coupon) it will pay you on the borrowed money.
What are junk bonds quizlet?
A junk bond refers to high-yield or noninvestment-grade bonds. Junk bonds are fixed-income instruments that carry a credit rating of BB or lower by Standard & Poor’s, or Ba or below by Moody’s Investors Service. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.
What happens to junk bonds when interest rates rise?
The value/price of a high-yield corporate bond is also affected by changes in the interest rate: Changes in interest rates can affect all bonds, not just high-yield bonds. If the interest rate increases, the value of the bond will decrease.
What is an example of a junk bond?
Real World Example of a Junk Bond Tesla Inc. (TSLA) issued a fixed-rate bond with a maturity date of March 1, 2021 and a fixed semi-annual coupon rate of 1.25%. The debt received an S&P rating of B- in 2014 when it was issued. In October 2020, S&P upgraded its rating to BB- from B+.
Why would someone buy a junk bond?
Junk bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors. Junk bonds are also called high-yield bonds since the higher yield is needed to help offset any risk of default.
What is the simple definition of a junk bond?
A junk bond, also known as a speculative-grade bond, is a high-yielding fixed income security with a high risk of default on payment. When you buy bonds, you’re lending money to the bond issuer—a company or a government entity—that promises to pay you back with interest when the bonds mature.
What are the disadvantages of junk bonds?
The main disadvantage of junk bonds is their risk. They have a higher risk of default than most other fixed-income securities. Junk bonds can be quite volatile, especially in times of uncertainty regarding the issuer’s performance.