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.