Junk Bond -- A complete definition

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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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