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High-Yield Bonds or Junk
Bonds
Source:
Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order
it here)
Low
grade, speculative bonds below investment grade, given S&P credit
ratings of BB, B, CCC, or CC. High-yield bonds are frequently used in corporate take-overs
and leveraged buyouts. These
bonds have a long history in the financial market but emerged as an important
type of debt in the 1980s. The
investment banking firm of Drexel Burnham Lambert was a leading underwriter
and marketer of these bonds. Defaults
on high-yield bonds have been considerably higher than those on investment-grade
bonds. In 1986, the default
rate was around 3% (the year of the LTV bankruptcy).
In 1985 and 1986, junk bonds issued amounted to $22.1 and $29.8
billion, respectively. Insider
trading scandals were associated with the issuance of junk bonds in the
1980s.
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