nk bond mandarin at Drexel Burnham. The successful public marketing of high yield, high risk bonds issued by the textile manufacturer, Milliken &
3F. S. Worthy, "Trying Times for Junk Bonds," Fortune, 7 December 1987, 59.
Company, provided a major impetus in the development of the junk bond market.
Drexel Burnham Lambert, led by Milken in its junk bond operations, continued to be a major player in the development of the junk bond market. In fact, the firm eventually pub lished an index of 110 leading junk bonds.7
The original impetus for the development of the junk bond market was provided by the combination of the bull market in equity securities, which began in August 1982, and the recovery from the recession of the early 1980s, which began in 1983. The combination of these factors lessened the risk of default for investors in junk bonds, while providing the issuers of the junk bonds a basis for a belief that the promised high returns could be sustained.
The leveraged buyout boom of the early to mid 1980s pro vided a second strong impetus for the further development of the junk bond market.8 Leveraged buyout artists, such as Ivan Boesky, found that junk bonds were an almost ideal way, in the pre October 1987 crash environment, to finance their transac tions.9 The growth of the junk bond market took off, with its application to leveraged buyout deals in the mid 1980s.
As already stated in this research, junk bonds promise a high return, on a high risk. The success of the junk bond
9Ibid. 4market, however, depended upon realized returns, as opposed to promised returns.10 To realize returns on junk bonds, it is essential that the issuing company not default on the securi ties.
Studies of the junk bond market for the period prior to the October 1987 crash found low default levels.11 It was also found that the realized returns on junk bonds were higher, to a statistically significant degree...