This Paper has won Consolation Prize in the CoolAvenues' Paper-writing Competition - "In Search of Excellence" - for the Year 2005.

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1. Introduction to Junk Bonds

1.1. What is a Junk Bond?

Junk Bond is a high-risk, non-investment-grade bond with a low credit rating, usually BB or lower, that has a high yield. Hence, they are also known as High-yield Bonds.

Bonds often receive this type of low rating when the corporation, municipality or other entity that issued the bond, is facing financial trouble. In these cases, the credit risk on the bonds is fairly high - in other words, there is a relatively decent chance that the junk bond issuer will have trouble fulfilling its repayment obligations (including interest and principal).

1.2. Credit Ratings

Bond fund credit quality ratings are based on the overall credit worthiness of the securities in a fund's portfolio. The ratings are broadly classified into two categories - secure and vulnerable - indicating the relative safety or vulnerability of the fund's portfolio against credit defaults of underlying securities.

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* Contributed by -
Neha Agarwal & Padmakar Kulkarni,
PGDIM - XI,
NITIE, Mumbai.