Junk Bond
A high-yield bond rated below investment grade, carrying higher default risk.
What is Junk Bond?
A junk bond — also called a high-yield bond or speculative-grade bond — is a corporate bond rated below BBB−/Baa3 by major rating agencies. These bonds carry a higher probability of default and therefore must offer higher coupon rates to attract investors. Companies issue junk bonds when they cannot access investment-grade debt markets, often during leveraged buyouts, early-stage growth phases, or periods of financial stress. High-yield bonds occupy a middle ground between investment-grade bonds and equity in the capital structure.
Example
During the leveraged buyout boom of the 1980s, Michael Milken's use of high-yield bonds at Drexel Burnham Lambert financed many large acquisitions, popularizing the term "junk bond" for mass audiences.
Source: Investopedia — High-Yield Bond