Junk Bond Definition
Municipalities and corporations issue bonds to raise funds for a particular purpose. Unlike buying stocks, which are a percentage of ownership, buying bonds is like making a loan. The credit rating attached to the bond helps define the security of the investment.
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Definition
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A junk bond is defined as a high-risk issue when it carries a BB credit rating or lower. These bonds are not traded in normal markets.
Return
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Like most high-risk investments, junk bonds offer higher returns than low-risk investments--typically 3 to 4 percent higher than traditional bonds.
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Maturity
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At maturity, if bonds are successful, yields range from 150 to 300 percent.
Markets
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Junk bonds are offered through high-yield markets, such as Bear Stearns High-Yield Index or Merrill Lynch High-Yield Index.
Risk
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Since these bonds are high risk, you can lose your entire investment. Some investors purchase mutual funds that contain junk bonds to spread the risks through diversification.
Terms
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Junk bonds are also known as "high-yield" or "speculative" bonds.
History
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Junk bonds became very popular in the 1980s and led to many scandals. Although not as popular today, many investment portfolios still include them. These bonds are often used to finance corporate takeover bids.
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