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High Yield Bonds

High yield, or junk, bonds have been labeled as the bad boys of Wall Street. These are bonds issued from businesses whose debt is rated B or lower by the major rating agencies. A bond can either start out as a junk bond or be reclassified as junk when a rating agency downgrades it. As a result, some of the companies making up this category climb up the ratings ladder and some move the other way. However, just because a bond is downgraded by the rating agencies doesn't mean that it stays down. Chrysler was down and almost out in 1980, and its bonds were the lowest of junk. Today, Chrysler bonds are investment grade. But the checkered past of the junk bond industry has no better icon than that of a man named Michael Milken.

Almost everyone in the investment industry has heard of Michael Milken and the infamous junk bond scandal of the late 1980s and early 1990s. Milken made billions by getting corporations and financial institutions to purchase junk bonds as the spread (the difference) between junk bonds and other bonds was steep. Milken was not convinced that the ratings agencies were doing an effective job of rating all but the lowest-risk companies' debt. This means that the price, or yield, of the junk bond was attractive enough to override concerns about the company issuing the debt.


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