bondholders first right to the transportation equipment. Income bonds are given in exchange for other bonds already issued, and are generally issued only in the face of impending bankruptcy (Apostolou, 1990, p. 7).
Bonds of all types are rated by various investor groups, including Standard and Poor's and Moody's. The rating systems are similar, with Standard and Poor's using AAA, AA, A, BBB, BB, B, CCC, CC, C and D. Moody's uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. The first four categories are investment grade, which means that institutional investors generally reserve their bond purchases to these categories. Junk bonds are those whose ratings are less than BBB (Baa).
Junk bonds historically have had yields three to six percentage points above US Treasury bonds, but the gap has been as great as seven percent (Apostolou, 1990, p. 64). During the 1980s, long-term junk bonds returned a compound average of 14 percent, more than 1.5 per year higher than investment grade corporate bonds, and more than three percent higher than Treasury bonds with similar maturities (Apostolou, 1990, p.
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