See Also:
Common Stock
Company Valuation
Convertible Debt Instrument
Coupon Rate Bond
Covenant Definition of a Bond Contract
A non-investment grade bond, also called a speculative bond, a high yield bond, an unsecured debenture, or a junk bond, is a bond that is considered a low quality investment because the issuer may default. Rating agencies have systems for rating bonds as investment grade or non-investment grade. Non-investment grade bonds offer higher yields than investment grade bonds to compensate for the greater risk.
Credit rating agencies rate bonds based on the creditworthiness of the issuer. A bond is given a grade. Rank the grades like this: AAA, AA, A, BBB, BB, B, CCC, CC, C, and at the bottom is D.
The highest quality corporate bonds will have a rating of AAA. The lowest quality bonds are rated D, or already in default. Anything rated BBB or above is investment grade. Anything rated BB or below is non-investment grade. Different rating agencies may use different variations of the above rating system. For example, an agency may include plus (AA+) and minus (BBB-) signs to add levels to the rating system.
Junk bonds return higher yields than high-quality bonds. The higher yield compensates the investor for the greater risk associated with the lower quality investment.
A junk bond index tracks the performance of non-investment grade bonds.
A junk bond trader is an individual who trades non-investment grade bonds in the marketplace.
A junk bond fund is a mutual fund or an exchange-traded-fund (ETF) comprised of non-investment grade bonds. Junk bond funds are convenient financial instruments for investing in high yield bonds.
