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junk bond
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junk bond

Derogatory term for a security officially rated as ‘below investment grade’. Junk bonds are fixed interest loans paying above average levels of interest with corresponding above average levels of risk. Junk bonds became popular in the USA during the 1980s economic boom. They are commonly used to raise capital quickly, typically to finance takeovers to be paid for by the sale of assets once the company is acquired. This method of financing takeovers normally beyond a company's reach was invented by US-born bond trader Michael Milken. The problem with this strategy as it was used in the 1980s was that, following the takeover, the resulting company was so highly geared that its debt repayments eroded any potential profits.

In the US securities market, junk bonds probably diminish since they must now pay an average of over 5% more than the prevailing treasury bond rate in order to attract investors. Studies suggest that more than 35% of junk-bond issues may default.


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High-yield bonds, better known as junk bonds because of their low credit rating and low sensitivity to interest rates, were added, with a smattering of mutual funds that invest in bonds overseas.
Ten days later, there followed another shocking revelation: Credit Suisse First Boston had underwritten more junk bonds in 2003 than in 2002, but made less profit from the business.
Junk bonds, by paying investors a higher rate of return in recompense for assuming a higher level of risk, provide an effective means of bypassing traditional financing channels.
 
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