The research examines the rise and fall in the popularityof the so called junk bond market in the United States. As junk bonds were and are issued in conjunction with leveraged buyouts (LBOs), this type of financial maneuver is also examined.
The term junk bond is used to describe an (1) original issue, (2) high yield, (3) low grade, (4) corporate bond.1 In the context of high and low grade, this definition is gener ally applied so that the lowest ranked bond which would be included in the high grade classification would be Moody's Baa.2 Junk bonds, thus, are, generally speaking, those ori ginal 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 characterize high grade, or
1M. I. Weinstein, "A Curmudgeon's View of Junk Bonds," Journal of Portfolio Management (Spring 1987): 76.
2investment 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.3
A leveraged buyout is a procedure whereby one firm is acquired by another. In a leveraged buyout, the cost of the purchase is largely borne by the firm being acquired. In most instances, these deals are structured to be financed by junk bonds.
The junk bond market developed as an alternative to the private placement of high yield, high risk bonds.4 The devel opment 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.5
The investment banking house Drexel Burnham Lambert played a major role in the development of the junk bond market.6 Michael Milken was the principal ju...