Junk Bonds

Junk Bonds refer to bonds that are rated below investment grade by Credit rating agencies, typically receiving a rating of BB or lower by Standard & Poor’s or Ba or lower by Moody’s. These bonds carry a higher risk of default compared to investment-grade bonds, leading to higher yields to compensate investors for the increased risk.

Examples of junk bonds include:

• Ford Motor Company Bonds (2019): In 2019, Ford issued bonds that were rated below investment grade due to concerns about its financial health, but offered higher yields to attract investors.
• Verizon Communications Inc. (2020): Verizon issued bonds during this period that were rated as junk, as the company took on significant debt to fund acquisitions, leading to a riskier profile.

Cases illustrating the impact of junk bonds include:

• High-Yield Market (2008 Financial Crisis): During the financial crisis, many junk bonds saw sharp declines in value as companies faced increased likelihood of default, leading to wider spreads and greater investor caution.
• Teva Pharmaceutical Industries (2017): Teva’s bonds were downgraded to junk status due to its mounting debt and declining revenues, which reflected the high-risk nature of their bonds.