Junk Bond(by Mrinalini Krishna) - 趙永祥的數位歷程檔

Junk bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments. A bond is a debt or promise to pay investors interest payments along with the return of invested principal in exchange for buying the bond. Junk bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors.

Junk bonds are also called high-yield bonds since the higher yield is needed to help offset any risk of default.

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Why Is 'Junk Bond' the Term of the Day?

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A junk bond rating is meant to warn investors that a company may not be in the best position to repay its debt. For investors with a higher risk appetite, junk bonds might be appealing, but when the company is facing other pressures, a junk bond rating can hurt it further.

Take First Republic Bank (FRC) for example. The company is facing a crisis of confidence from customers as well as investors, and despite a $30 billion rescue orchestrated by some of the biggest banks in the country, the company has continued to lose deposits and its shares fell. Ideally, to boost liquidity it would tap the Fed’s Bank Term Funding Program, but it can’t do that meaningfully. Investors would be wary of its corporate debt, which was pushed further into the “speculative” or junk bond category by S&P Credit ratings.

On the other end of the bond ratings spectrum, Tesla (TSLA) recently received an upgrade from Moody’s. With a new Ba3 rating from Moody’s, Tesla’s bonds are out of the junk bond category and into investment grade.

“Tesla will remain one of the foremost manufacturers of battery electric vehicles with an expanding global presence and very high profitability,” said Moody’s in a press release. “The upgrade also incorporates governance considerations, including Tesla's prudent financial policy and management's operational track record,” the ratings agency added.

-Mrinalini