JUNK BOND:

Junk bonds, also classified less pejoratively as high-yield bonds, are bonds rated as
"speculative" or "low-investment" debt issues: below BBB for bonds rated by Moody's and
below Baa for bonds rated by Standard and Poor's (the two major debt-rating agencies). Bond
ratings assess the potential probability that the issuer of the bonds will not make interest
payments or repay the principal at maturity. The riskier the bond, the more comparable the
other things, the lower its rating.
Today, junk bond issuers who are household names include the U.S. Steel, Delta, Dole Foods.
Moreover, the use of high-yield securities for corporate funding increased considerably after
the mid-1990s in Latin America , Asia and Europe (both in the transition markets of Central and
Eastern Europe and the European Union). Many high-yield bonds issued in the United States
are now being imposed by international companies powered by privatisations, mergers and
restructurings, and emerging technology expansions.
High-yield corporate bonds are often referred to as junk bonds. This less than glamorous
definition derives from the fact that these types of bonds are issued by companies that are not
the most creditworthy. Buying a bond from a stable big business (think IBM, Microsoft , Apple,
etc.) offers a very strong probability that half-year interest payments will be made without fail
over the life of the bond and that the principal value will be paid back to the lender when the
bond matures.
Over time, most of these bonds have been good and have charged enough extra interest to
investors to account for a few mistakes along the way and still get ahead. High-yield bonds
typically pay an average of 5 to 6 per cent higher interest than bonds from large well-
established corporations.
The Information Technology Index is structured to track the performance of US dollar-
denominated high-yield corporate bonds issued by companies in countries with official G-10
currencies, except Eastern Europe, by constituents in the information technology field.
Qualifying securities must have a low investment rating (based on the lowest of S&P Global
Ratings, Moody's and Fitch).
New computing technology and expanded access to the Internet have the potential to have a
huge effect on investment advisory services in the next century. Many investment advisors
profit from the detailed knowledge available electronically to study possible investments for
their clients.
Information and communication technologies are vital to stable and productive primary and
secondary markets. Information Technology (IT) advances have been one of the key underlying
factors that have led to the reshaping of international trade and international capital flows over
the last decades. Among the other forces that have been successful, we must highlight the
importance of liberalization and the removal of barriers to trade.
Investors and funds are witnessing a stinging sensation after accumulating junk bonds issued by
a variety of healthcare firms that are now drawing criticism for their high debt levels and
excessive drug pricing. Bond rates released by a variety of firms suspected of being overpriced –
including Valeant Pharmaceuticals, Endo International and Mallinckrodt – have dropped
dramatically, driving up profits, following criticism of the cost of medicines.
Hillary Clinton, the Democratic presidential candidate, last week characterised price gouging as
"outrageous" and vowed to crack down on such activities, while Congressional Democrats
urged Valeant to be subject to "huge price hikes."
Comments also contributed to uncertainty in the high-yield bond market sector that has been
resilient until recently, with several businesses taping debt markets to finance multibillion dollar
mergers and acquisitions.
Now investors are withdrawing, rising the aversion to lower-quality corporate debt and even to
equity in the wider market.
Valeant 's paper maturing in 2025, which is a junk classified by both Standard & Poor's and
Moody's, traded as low as 91.75 cents on the dollar earlier this week, before rebounding to
95.88 cents by the end of Wednesday. One month ago, the $3.25 billion issue traded 102.75
cents on the dollar.
Bonds issued by Mallinckrodt and Endo maturing in 2023 slid below par after trading more than
100 cents on the dollar in the first half of September.
Last month, prices of junk pharmaceutical bonds fell by 4.33%, offsetting the 0.48% return on
debt coupons, according to Barclays Indices. On the other hand, the overall high-yield corporate
market decreased by 2.75 per cent.
Pressure on pharma bond rates comes as firms have been criticised for the way they market
their products. The price paid by Endo for a bottle of 50 100 mg doxycycline hyclate tablets
used to treat bacterial infections increased by almost 5,000 per cent from $4 to $191 between
October 2013 and April 2014.
Potential price regulation could temper the earnings growth of these three debt-ridden classes,
depress valuations and reduce the amount each may spend on acquisitions or shareholder-
friendly activities, such as stock buybacks and dividends.

In 1991, the demand for new junk issues, propelled by an environment of generally declining interest
rates, staged a dramatic turnaround. Disgusted by the low rates on deposit certificates and investment-
grade bonds, many investors have taken a new interest in junk. Also, corporate purchases of junk bonds
helped to improve the market. Former Drexel clients such as RJR Nabisco and McCaw Cellular
Communications have seized the ability to acquire and withdraw high-cost debt. Repurchases shored up
the company's balance sheets and made their remaining junk bonds more creditworthy, causing bond
prices to increase. We might still be just at the beginning of the junk era. A number of current
developments could improve and consolidate the market and even shift its course in the future. A
simple invention is the junk fund — a bond fund investing in high-yield securities whose credit rating is
valued below the investment grade. Spreading the risks between various sectors and different
companies, the bond fund is likely to be able to reduce the aggregate risk while also providing an
attractive return to the investment public. Riding the wave of resurgent junk markets in 1991, bond
funds received an average total return of 36% that year, including dividends and price appreciation. And
the junk funds turned in 1992 and 1993 in two years of strength. High-yield debt is increasingly no
longer provided for refinancing existing junk or bank debt, but for expansion or other purposes. Some
firms are also issuing a rough patch of cyclically low income or market overcapacity to weather the
weather.

More fanciful invention is the collateralized bond obligation, or CBO. A CBO is a repackaged and
overcollateralized junk tub. For example, a $150 million CBO issue could be backed by junk bonds with a
face value of $180 million. Diversification and extra-payments allow the CBO to obtain investment-grade
credit ratings from credit rating agencies. Generally, CBOs have three "tiers." The top level, consisting of
a pool of higher-quality junk bonds, could pay its investors an interest of about 8 per cent. The second
stage, a little less stable, may have an 11 per cent coupon rate. The bottom, and the riskiest, does not
pay a fixed interest rate. Instead, third-tier holders will earn residual interest payments that will remain
until the top-tiers have been compensated.