What is a junk bond?

The definition of junk bond, also known as a structured bond, is a fixed income security that presents a high risk of default, hence it also has a higher interest rate. Therefore they can be considered as scarce titles credit quality, which can be issued both by the State and by companies, although in general they tend to be little known companies or that lack a good reputation in the market.

The ability to repay junk bonds is quite doubtful, and the situation may worsen due to changes in the economic situation.

They present a interest rate quite high with the intention of making it an attractive product for the investor, who must also value the high risk of default. In fact, the junk bond market often has specialized investors such as wealth managers, alternative investment, fondos de inversión or insurance, which aims to achieve a higher return in exchange for bearing a greater risk. Most traditional investors avoid spending their money on assets whose rating is less than a specified amount.

Who gives the junk bond rating?

The junk bond rating is carried out by rating agencies, especially Mody's, Standard & Poors and Fitch, which establish a credit value for each bond focusing on a study of probabilities on the evolution of the companies that issue said bond. There are no set standards for establishing bond ratings, although the best ratings are typically labeled 'A' and the worst rated 'B'.

Different publications collect that in 2015 the highest number of companies with a junk bond rating was reached. These companies are known as Fallen Angels or Fallen Angels, with Russia as the main protagonist with 64% of their companies having the junk bond rating.

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