Finance Dictionary
Junk Bond
Definition
A high-yield, high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover.
Deep Dive
A junk bond, formally known as a high-yield bond, is a debt instrument issued by companies with lower credit ratings, typically below investment grade (e.g., BB+ or lower by S&P). These bonds carry a significantly higher risk of default compared to investment-grade bonds, as the issuing companies often have unstable financial health, high levels of existing debt, or unproven business models. To compensate investors for this elevated risk, junk bonds offer substantially higher interest rates or yields, making them attractive to those seeking greater potential returns.
Examples & Use Cases
- 1A heavily indebted company issues new bonds with an 11% interest rate to finance a risky takeover bid, classifying them as junk bonds
- 2A startup with limited operational history and negative cash flow issues bonds to secure expansion capital, which are rated as speculative grade due to high default risk
Related Terms
High-Yield BondCredit RatingDefault Risk