Definition of Junk Bond
By Dave Manuel
What is a “junk bond”? What is the definition of a “junk bond”? What does the term “junk bond” mean?
A “junk bond” is a bond that has a Ba1/BB+ rating or lower.
A “junk bond” has an increased possibility of default, which is why it is lovingly called a “junk bond”.
Junk bonds offer higher rates of interest, which is how they are able to attract speculators.
A bond rating agency like Moody’s has a number of different ratings that can be assigned to corporate or government debt issues. In the case of Moody’s, Aaa is the highest possible rating that a bond can have. The Aaa rating is usually the domain of sovereign nations that are in strong financial shape.
As you move down Moody’s list of ratings, you will eventually hit the rating of Ba1. This rating, and any rating underneath of it, is considered to be “junk” status. Bonds with junk ratings are considered to be speculative and of a non-investment grade.
Why is it such a big deal for a company or government to have their debt rated as “junk”? As I said, higher interest rates are paid out by bonds with junk status, so issuing debt becomes more and more costly the worse that your rating is. A company with a Ba1 rating will pay substantially more to service their debt than a company with a Aa1 rating.
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