What is Junk Bond?


Experienced Lawyers Protect Investors

Zamansky LLC is a Wall Street based law firm that specializes in securities fraud. We represent investors who have suffered losses due to the negligence or fraud of a broker or financial advisor.

To prove negligence, our lawyers investigate whether the bond issuer or financial advisor adequately reviewed our client’s complete financial circumstances before making a recommendation and whether our client understood the risks involved in investing in a junk bond. When appropriate, we may also pursue a fraud or breach of fiduciary duty claim against a bond issuer, broker or financial advisor.

High-Yield, High-Risk Investments

A junk bond is a high-yield, high-risk, non-investment grade bond. The term junk bond arises because of the high rate of default of these speculative, fixed-income instruments compared to investment grade bonds.

Often, these bonds are fallen angels that have been downgraded from investment grade to junk bond status or whose price has drastically dropped. The bond may be undervalued, in which case the investment could yield high returns once the bond’s rating is upgraded. Conversely, falling stock prices may indicate the company is headed toward bankruptcy or may never recover its former value.

Junk Bond Ratings

The three major credit rating agencies apply their own rating systems to indicate the investment quality of bonds. The bonds are rated in increments within the investment grade, non-investment grade and default categories. These low ratings are a clear indicator that an investment is a junk bond:

  • Moody’s: Rates non-investment bonds as “Not Prime” over short term and as “Ba1” or lower over the long term
  • Standard & Poor’s: Rates non-investment bonds as “B” or “C” over the short term and as “BB+” over the long term
  • Fitch Ratings: Rates non-investment bonds as “B” or “C” over the short term and as “BB+” over the long term

Junk Bonds Not Suitable for Low-Risk Investors

An investor who can withstand risk might invest in an undervalued bond with the goal of making a high return over a relatively short period of time. However, investment in junk bonds is usually inappropriate for low-risk investors because of the substantial risk that the bond will default or fail to ever increase in value.

Financial advisors, stockbrokers and brokerage firms have a duty to investors to evaluate the risks and provide recommendations based upon their clients’ specific circumstances. They also have a duty to explain the risk of loss involved in investing in junk bonds if recommending purchase of a noninvestment quality security.

Learn More About Junk Bond Investment Risks and Recovery

The securities attorneys at Zamansky LLC are true investor advocates. We encourage investors who have lost money because of junk bond fraud or negligence to contact a junk bond lawyer at our law firm for a free, confidential evaluation. We respond to all inquiries within 24 hours.