The purpose of this research is to provide an overview of the so-called junk bond market. In this research, the term junk bonds is defined, the history and experience of the market are examined, the effects of the October 1987 market crash on junk bonds is assessed, and the current status and future outlook of the junk bond market are stated.
Junk bond is the term used to describe an (1) original issue, (2) high-yield, (3) low-grade, (4) corporate bond (Weinstein, 1987, p. 76). In the context of high- and low-grade, this definition is generally applied so that the lowest ranked bond which would be included in the high-grade classification would be Moody's Baa (p. 76). Junk bonds thus, are generally speaking, those original issue corporate bonds which are below investment-grade. Investment-grade bonds are typically considered to be bonds included in the high-grade classification.
Low-grade bonds are generally associated with higher risk levels than those which characterized high-grade, or investment-grade bonds. Thus, while junk bonds offer a higher potential return on investment, the risk that the investment will be lost through default is correspondingly higher (Worthy, 1987, p. 59).
The junk bond market developed as an alternative to the private placement of high-yield, high-risk bonds (Worthy, 1987, p. 59). The development of the junk bond market marked the occurrence, for the first time since pre-1929 crash days, of public purchases at a significant level of less than investment-grade fixed income securities (Weinstein, 1987, p. 76).
The investment banking house Drexel Burnham Lambert played a major role in the development of the junk bond market (Worthy, 1987, p. 59). The successful public marketing of high-yield, high-risk bonds issued by the textile manufacturer, Milliken &
Company, provided a major impetus in the development of the bond market. Drexel Burnham Lambert continued to be a major player in...