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Junk Bond

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A junk bond is any bond that is rated below investment grade (BB or lower) by Moody's or Standard & Poor's due to the high risk of default. A junk bond is also referred to as a high yield bond. Prior to 1977, every junk bond was a previously investment grade bond for a company that had saw its credit quality erode. In that year, Bear Stearns underwrote an original-issue bond that started with a junk rating. Drexel Burnham Lambert quickly followed suit with a series of junk bond issues for companies that had been locked out of the bond market. Michael Milkin, who is often referred to as the junk bond king, led the Drexel Burnham junk bond initiative. The junk bond market peaked in 1989, when it was depressed by a series of issuer defaults. Many corporate bond issues today are given junk bond, or high-yield status, and even blue chip stocks have seen their bonds rated junk.



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