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.