Home » Eng Finance » Finance J

Finance J

Select topic from the list on the left. Should you not find what you are looking for, please feel free to send us a message and we will try to find it for you.

Junk bond

Junk bond

In the United States the loan stocks of companies are generally referred to as bonds. The attractiveness of loan stock to an investor will always be directly related to the element of risk. This risk factor is itself usually judged by the known creditworthiness of the company and, from the investors’ viewpoint, that creditworthiness is a function of the credit rating afforded the company by financial institutions or agencies which specialize in such matters. These credit-rating agencies classify corporate bonds according to the degree of risk they carry and many wellestablished U.S. companies have found that at one time or another their bonds in issue have received a low investment rating. Because many institutions are only permitted to buy high-rated bonds, the companies which lose their rating find a sudden fall-off in the saleabiUty of their bonds and the securities themselves become known as junk bonds. Because so many of these junk bonds are in fact the loan stock of essentially reputable companies, the high return they carry can be very attractive and the actual risk very small. For this reason they are growing in popularity.

Reference: The Penguin Business Dictionary, 3rd edt.