Junk Bond Market

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,

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Approximate Word count = 1140
Approximate Pages = 5 (250 words per page)