A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a “bottom-up” process. It focuses more on “downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds, they are diversified by industry group and issue type. Due to the high minimum size of bond trades, most individual investors are best advised to invest through high yield mutual funds. High yield bonds or “junk” bonds get their name form their characteristics. As credit ratings were developed, the credit agencies created a grading system to reflect the relative credit quality of bond issuers. The highest quality bonds are “AAA and the credit scale descends to “C”, and finally to the “D” of default category. Bonds are considered to have and acceptable risk of default or investment grade and encompass “BBB” bonds and higher. Bonds “BB” and lower are called speculative grade and have a higher risk of default. Most investors were restricted to investment grade bonds, speculative bonds developed negative connotations and were not widely held investment portfolios. Mainstream investors and investment dealers did not deal in these bonds. They result in junk since few people would accept the risk of owning them. In the 1980s, most junk bonds resulted from a decline in credit quality of former investment grade issuers. This was a result of a majo...
