2.9.3 High-yield or Junk Bonds Flashcards
What are junk bonds?
Non-investment grade bonds i.e. BB+ credit rating or lower are also known as junk bonds. They are a type of unsecured/partially secured corporate bonds that typically offer significantly higher yields to compensate for its lower credit rating.
Junk bonds are also known as _____
high-yield bonds
Which companies are rated non-investment grade?
The companies that do not have a long track record or that have a questionable ability to meet their debt obligations.
Junk bonds tend to act more like stocks and less like other bonds in their market behavior. Why?
Junk bonds are not sensitive to the market interest rate fluctuations. They are usually short term, high risk and high yield bonds. They are more affected by the market conditions and the financial performance of the issuer.
During a recession, declining corporate earnings tend to drive down the prices of junk bonds. Why?
During economic downturns, the junk bonds are highly affected as the issuing company’s financial performance suffers and that can affect the issuing company’s ability to fulfill their obligations. Post recession, one can see major appreciation in the prices of the junk bonds as the prospects of the issuing company improves.
Order the following yields from highest to lowest for a premium bond: yield to maturity, current yield, nominal yield.
- Nominal yield, current yield, yield to maturity
Order the following yields from highest to lowest for a discount bond: yield to maturity, current yield, nominal yield, yield to call.
Yield to call, yield to maturity, current yield, nominal yield
_____ is a measure of a bond’s sensitivity to interest rates.
Duration
_____ are secured bonds that offer bondholders a first lien on corporate property.
Mortgage Bonds
_____ are bonds that are secured by financial assets.
Collateral Trust Bonds
Bonds with a credit rating of _____ or lower are known as junk bonds.
BB+
