In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds The bond market (also known as the debt, credit, or fixed income market) is a Financial market where participants buy and sell Debt Fixed income refers to any type of Investment that yields a regular (or fixed return A Corporate Bond is a bond issued by a Corporation. The term is usually applied to longer-term debt instruments generally with a maturity date falling at least a A government bond is a bond issued by a national government denominated in the country's own Currency. In the United States, a municipal bond (or muni) is a bond issued by a city or other local government or their agencies Bond valuation is the process of determining the Fair price of a bond. A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company Software for Fixed assets management and Stock control developed in 2004. Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than Voting shares, and its terms are negotiated A voting share (also called common stock or ordinary share) is a share of Stock giving the Stockholder the right to vote on matters A Registered share is a Stock that is registered on the name of the exact owner A voting share (also called common stock or ordinary share) is a share of Stock giving the Stockholder the right to vote on matters A stock exchange, share market or bourse is a Corporation or Mutual organization which provides "trading" facilities for Stock The foreign exchange ( currency or forex or FX) market refers to the market for currencies. The derivatives markets are the Financial markets for derivatives The market can be divided into two that for exchange traded derivatives and that for In Finance, a credit derivative is a derivative whose value derives from the Credit risk on an underlying bond loan or other financial asset '"Hybrid securities"' often referred as "hybrids" are a broad group of securities that combine the elements of the two broader groups of securities Debt and Options are financial instruments that convey the right but not the obligation to engage in a future transaction on some Underlying security, or in a Futures In Finance, a futures contract is a standardized Contract, traded on a Futures exchange, to buy or sell a certain Underlying instrument A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future For the Thoroughbred horse racing champion see Swaps (horse. In finance a swap is a derivative in which two counterparties Commodity markets are markets where raw or primary products are exchanged In Finance, the money market is the global Financial market for short-term borrowing and lending Over-the-counter ( OTC) trading is to Trade Financial instruments such as Stocks bonds, commodities or derivatives Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom The spot market or cash market is a Commodities or Securities market in which goods are sold for Cash and delivered immediately The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Finance, a bond is a Debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and Interest A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors. In Finance, default occurs when a debtor has not met its legal obligations according to the debt contract e A credit event is the financial term used to describe either A general default event related to a legal entity's previously agreed financial obligation
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Flows and levels
Global issuance of high yield bonds more than doubled in 2003 to nearly $146 billion in securities issued from less than $63 billion in 2002, although this is still less than the record of $150 billion in 1998. Issuance is disproportionately centered in the U.S.A., although issuers in Europe, Asia and South Africa have recently turned to high yield debt in connection with refinancings and acquisitions. The United States of America —commonly referred to as the Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms In 2006, European companies issued over €31 billion of high yield bonds. [1]
Risk
The holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk, duration risk, convexity risk, repayment of principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk, political risk, and taxation adjustment risk. Interest rate risk is the risk (variability in value borne by an interest-bearing asset such as a loan or a bond, due to variability of interest rates. Credit risk is the risk of loss due to a debtor's non-payment of a Loan or other line of credit (either the principal or Interest (coupon or both Faced Interest rate risk refers to the risk of the market value of a bond changing in value due to changes in the structure or level of interest rates or credit spreads or risk premiums. The credit risk of a high yield bond refers to the probability and probable loss upon a credit event (i. e. , the obligor defaults on scheduled payments or files for bankruptcy, or the bond is restructured), or a credit quality change is issued by a rating agency including Fishers, Moody's, or Standard & Poors.
A credit rating agency attempts to describe the risk with a credit rating such as AAA. A credit rating agency ( CRA) is a company that assigns Credit ratings for Issuers of certain types of Debt obligations as well as the debt instruments A credit rating assesses the Credit worthiness of an individual Corporation, or even a country In North America, the five major agencies are Standard and Poor's, Moody's, Fitch Ratings, Dominion Bond Rating Service and A.M. Best. Standard & Poor's ( S&P) is a division of McGraw-Hill that publishes financial research and analysison Stocks and bonds. Moody's Corporation ( is the holding company for Moody's Investors Service which performs financial research and analysis on commercial and government entities Fitch Ratings Ltd is an international Credit rating agency dual-headquartered in New York City and London. DBRS is a credit rating agency headquartered in Toronto, Ontario. A M Best Company Inc, headquartered in Oldwick New Jersey, is Rating agency designated as an Nationally Recognized Statistical Rating Organization Bonds in other countries may be rated by US rating agencies or by local credit rating agencies. Rating scales vary; the most popular scale uses (in order of increasing risk) ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, with the additional rating D for debt already in arrears. Government bonds and bonds issued by government sponsored enterprises (GSE's) are often considered to be in a zero-risk category above AAA; and categories like AA and A may sometimes be split into finer subdivisions like "AA-" or "AA+". A government bond is a bond issued by a national government denominated in the country's own Currency. The government sponsored enterprises (GSEs are a group of Financial services corporations created by the United States Congress.
Bonds rated BBB- and higher are called investment grade bonds. A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's Bonds rated lower than investment grade on their date of issue are called speculative grade bonds, derisively referred to as junk bonds. In Finance, a high yield bond ( non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below
The lower-rated debt typically offers a higher yield, making speculative bonds attractive investment vehicles for certain types of financial portfolios and strategies. In finance a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual Many pension funds and other investors (banks, insurance companies), however, are prohibited in their by-laws from investing in bonds which have ratings below a particular level. A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a Pension plan for the exclusive purpose of financing pension A bylaw (sometimes also spelled by-law or byelaw) most commonly refers to a city or municipal law or ordinance passed under the authority of a Charter As a result, the lower-rated securities have a different investor base than investment-grade bonds.
The value of speculative bonds is affected to a higher degree than investment grade bonds by the possibility of default. A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's In Finance, default occurs when a debtor has not met its legal obligations according to the debt contract e For example, in a recession interest rates may drop, and the drop in interest rates tends to increase the value of investment grade bonds; however, a recession tends to increase the possibility of default in speculative-grade bonds. A recession is a contraction phase of the Business cycle. The U
Usage
The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "Fallen Angels".
The investment banker Michael Milken realised that fallen angels had regularly been valued less than what they were worth. Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and Michael Robert Milken (born July 4, 1946 in Encino California) is a criminal American financier and philanthropist who almost single-handedly His time with speculative grade bonds started with his investment in these. Only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organising the issue of bonds that were speculative grade from the start. Drexel Burnham Lambert was a major Wall Street Investment banking firm which first rose to prominence and then was driven into bankruptcy in February 1990 by its Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. The 1980s was the decade spanning from January 1 1980 to December 31 1989. In a leveraged buyout (LBO) an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time. A leveraged buyout (or LBO, or highly-leveraged transaction (HLT or "bootstrap" transaction occurs when a Financial sponsor acquires a controlling interest Cash flow (also called net cash flow) is the balance of the amounts of Cash being received and paid by a business during a defined period of time sometimes tied
In 2005, over 80% of the principal amount of high yield debt issued by U. S. companies went toward corporate purposes rather than acquisitions or buyouts.
High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. For other subjects with the same abbreviation see CDO. Collateralized debt obligations (CDOs are an unregulated type of Asset-backed security A credit rating assesses the Credit worthiness of an individual Corporation, or even a country In Structured finance, a tranche (misspelled as traunch or traunche) is one of a number of related securities offered as part of the same transaction The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.
High-yield bond indices
- See also: Bond market index
High-yield bond indices exist for dedicated investors in the market. A bond market index is a listing of bonds or fixed income instruments and a statistic reflecting the composite value of its components A bond market index is a listing of bonds or fixed income instruments and a statistic reflecting the composite value of its components Indices for the broad high yield market include the CSFB High Yield II Index (CSHY), the Merrill Lynch High Yield Master II (H0A0), and the Bear Stearns High Yield Index (BSIX). The Merrill Lynch High Yield Master II Index (H0A0 is a commonly used Benchmark index for high yield corporate bonds. Some investors, preferring to dedicate themselves to higher-rated and less-risky investments, use an index that only includes BB-rated and B-rated securities, such at the Merrill Lynch BB/B Index. Other investors focus on the lowest quality debt rated CCC or Distressed securities, commonly defined as those yielding 1000 basis points over equivalent government bonds. Distressed securities are securities of companies or government entities that are either already in Default, under Bankruptcy protection or in distress A basis point (often denoted as bp or ‱ rarely permyriad) is a unit that is equal to 1/100th of a Percentage point.
Citations
See also
External links
- The Basics of High Yield Bonds
- Thomson - Financial - League Tables
- Junk Bonds: Everything You Need to Know
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