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| Junk Bond |
A junk bond is a fixed-income
security that is rated below investment grade by one or more of the major bond
ratings agencies. Bonds often receive this type of low rating when the
corporation, municipality or other entity that issued the bond is facing
financial trouble. In these cases, the credit risk on the bonds is fairly high
-- in other words, there is a relatively decent chance that the junk bond issuer
will have trouble fulfilling its repayment obligations (including interest and
principal).
Several independent rating services
have been established in order to evaluate the risk associated with corporate
and municipal bonds. The best-known bond rating firms are Standard & Poor's
and Moody's. Before issuing a bond rating, these companies first measure the
financial stability of the bond issuer. They then assign ratings to the
underlying firm's bonds. Although the actual ratings scale varies from agency to
agency, it generally ranges from triple A to D. Junk bonds are those rated BA or
below by Moody's, or BB or below by Standard and Poor's.
The following table will give you a
better idea of what each type of bond rating means, as well as the difference
between investment-grade bonds and junk bonds.
| Moody's |
S&P |
Meaning |
|
Investment Grade Bonds |
|
| Aaaa |
AAA |
Bonds of the highest quality that offer the
lowest degree of investment risk. Issuers are considered to be extremely
stable and dependable. |
| Aa |
AA |
Bonds are of high quality by all standards,
but carry a slightly greater degree of long-term investment risk. |
| A |
A |
Bonds with many positive investment
qualities. |
| Baa |
BBB |
Bonds of medium grade quality. Security
currently appears sufficient, but may be unreliable over the long term |
| Non
Investment Grade Bonds (Junk Bonds) |
|
| Ba |
BB |
Bonds with speculative fundamentals. The
security of future payments is only moderate. |
| B |
B |
Bonds that are not considered to be
attractive investments. Little assurance of long term payments. |
| Caa |
CCC |
Bonds of poor quality. Issuers may be in
default or are at risk of being in default. |
| Ca |
CC |
Bonds of highly speculative features. Often
in default. |
| C |
C |
Lowest rated class of bonds. |
| - |
D |
In default. |
|
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