What is a junk bond?

Why were junk bonds so popular in the 1980s? Why are they less popular today?

A junk bond is a bond which is rated below investment grade on its date of issue. Junk bonds became popular in the early 1980s primarily through the efforts of Michael Milken at the investment banking firm of Drexel, Burnham, Lambert. Milken argued successfully that the interest rate on these bonds was greater than the rate appropriate for their risk of default which made them a very attractive investment. Investors flocked to junk bonds for their high yields, providing a considerable amount of funds to new and high-risk ventures. The 1980s was a period of economic growth¾there were few defaults on junk bonds throughout most of the decade which supported Milken’s assertions. However, the recession and Milken’s highly publicized legal troubles in the late 1980s burst the junk bond bubble. Fewer junk bonds are issued today, and those that are outstanding are evaluated much more realistically.

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