What Are ‘Junk Bonds?’ With PM-Drexel Bjt
NEW YORK (AP) _ The so-called ″junk bonds″ pioneered by Drexel Burnham Lambert Inc. are corporate securities that pay a high interest rate because they carry a higher risk of repayment than do conventional bonds.
The bonds are designed to allow companies without a track record of earnings to borrow money based on whether they have sufficient cash flow to pay off their debts.
Junk bonds pay higher interest rates than conventional ″investment grade″ bonds because they are viewed as riskier investments, often because they are used in transactions that saddle a company with large amounts of debt. The bigger debt load increases the risk that a company might default on its debt payments.
Junk bonds came into prominence during the 1980s as a means of financing corporate buyouts, especially debt-dependent leveraged buyouts.
In the last 10 years, the junk bond market has grown explosively, from less than $25 billion in bonds issued in 1977 to around $160 billion last year - or 25 percent of the $650 billion corporate debt market.
The average company issuing junk bonds is about 36 years old, has around $1 billion in assets and employs more than 4,000 people, according to Drexel’s calculations.