Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is a “Junk Bond” A junk bond is exactly the same as a regular
bond.
Junk bonds are an IOU from a corporation or organization or country that states the amount
it will pay you back called the principal, the date it will pay you back known as the
maturity date and the interest it will pay you on the borrowed money.
Junk bonds differ because of their issuers' credit quality.
All bonds are characterized according to this credit quality and therefore fall into one
of two bond categories, investment grade and junk.
These are the bonds that pay high yield to bondholders because the borrowers don't have
any other option.
Their credit ratings are less than pristine, making it difficult for them to acquire capital
at an inexpensive cost.
Junk bonds are typically rated 'BB' or lower by Standard & Poor's and 'Ba' or lower by
Moody's.
Junk bonds are risky investments, but have speculative appeal because they offer much
higher yields than safer bonds.
Companies that issue junk bonds typically have less-than-stellar credit ratings, and
investors demand these higher yields as compensation for the risk of investing in them.
A junk bond issued from a company that manages to turn its performance around for the better
and has its credit rating upgraded will generally have a substantial price appreciation.