Home Finance Quick Overview On Junk Bond

Quick Overview On Junk Bond

Quick Overview On Junk Bond

What is a Junk Bond?

A Junk Bond is a type of a bond that is classified as per its Grade ranking with regard to both the inherent risk of repayment, as well as the stipulations implicit within the terms of the loan itself. The term Junk Bond receives this negative moniker due to the fact that there exists an implication in which the inherent improbability of repayment on the part of the borrower is considerably higher than its lower-risk counterparts.

Due to the inherent risk of default, a Junk Bond typically retains an interest rate that is considerably higher than those interest rates offered with standard bonds; a financial history on the borrower that reflects the default of loans, failure to repay, or bankruptcy will typically result in lowered bond grades – this serves to alert the owner of a bond that a presence of risk exists in conjunction with the bond itself.

What is a Bond?

In contrast to stocks, which are individual shares of a publically-traded company available for purchase on the commercial investment market, a bond is a loan that is given by an individual investor. Perhaps the most common types of bonds within the United States are United States Government Bonds; these bonds are loans indirectly granted to the Federal Government available for commercial purchase – as the bond matures, the latent interest grows:

The growth of an individual bond normally relies on the length of time that bond remains in one’s possession; redeeming a bond immediately after its purchase will normally lack any substantial financial gain, as there has not existed a sufficient amount of time provided for the development of interest

As the name suggests, a bond is a financial instrument that acts as a loan to a company or institution; the term bond signifies an implicit responsibility with regard to repayment – although repayment in regards to a Junk Bond is not impossible, the term ‘Junk Bond’ suggests the implicit risk of a failure of the borrow to successfully satisfy repayment

Types of Bonds

Bonds range from low-risk financial instruments to a ‘high-risk’ Junk Bond, bonds varying in nature may be offered for purchase – or individual investment – within the realm of trade and exchange markets. The identification – and subsequent classification – system employed by the investment market providing a setting for the sale of bonds – as well as Junk Bond – allows for investors to be made privy to any or all inherent risks latent within the nature of a bond itself:

1.       Bond Rating: AAA

          Bond Grading: Investment Bond

          Inherent Risk: Lowest Risk

2.       Bond Rating: AA              

          Bond Grading:Investment Bond

          Inherent Risk: Lower Risk

3.       Bond Rating: A

          Bond Grading:Investment Bond

          Inherent Risk: Lower Risk

4.       Bond Rating: BBB

          Bond Grading:Investment Bond

          Inherent Risk: Moderate Risk

5.       Bond Rating: BB to B

          Bond Grading: Junk Bond

          Inherent Risk: Great Risk

6.       Bond Rating: CCC to C

          Bond Grading:Junk Bond

          Inherent Risk: Greatest Risk

7.       Bond Rating: D

          Bond Grading:Junk Bond

          Inherent Risk: Bond Currently in Default