Speculative-grade bond


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Related to Speculative-grade bond: Investment grade bond

Speculative-grade bond

Bond rated Ba or lower by Moody's, or BB or lower by S&P, or an unrated bond.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

High-Yield Bond

A bond with a low rating. Bonds rated less than Baa3 by Moody's or BBB- by S&P or Fitch are considered high-yield bonds. They have higher yields because they have a higher risk of default on the part of the issuer. High-yield bonds are considered sufficiently high-risk that the law does not allow banks to invest in them. They are also called low-grade bonds, and, informally, junk bonds.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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One factor has been the expansion of the market for speculative-grade bonds. Because low-grade bonds typically have a junior standing in the issuing firm's capital structure and, more important, because their high returns are particularly vulnerable to a drop in earnings, these bonds have risk and return characteristics similar to those of both common stock and debt.
In addition, speculative-grade bonds accounted for 69% of equity.
Columns 7 and 8 of Table 1 present default rates on investment-grade and speculative-grade bonds, respectively, calculated by Fons, Carty, and Girault (1993).
Call options on corporate bonds are now mostly observed on speculative-grade bonds and on long-term investment-grade bonds (e.g., bonds with maturities of 30 years or longer).
Figure 1 shows the distribution of maturity and callability for investment-grade and speculative-grade bonds. In our sample, speculative-grade bonds are almost exclusively 7 to 12 years in maturity, most are callable, and none has a maturity over 20 years.
Among callable speculative-grade bonds, 93% have a first call date three or five years after issuance.
Given the typical maturities and call dates of riskier bonds, call option values on speculative-grade bonds are unlikely to surpass those of high-grade bonds unless the lower-tier issuers set sharply lower call prices.