Junk Status Definition

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william1941's profile pic

william1941 | College Teacher | (Level 3) Valedictorian

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In the financial world there are many instruments like bonds, debentures among many other where the seller promises to pay the buyer a constant return which is defined when the instrument is sold.

Based on the ability of the seller to honor the payments due every year, financial rating agencies like Moody’s, Standard and Poor’s give these instruments a rating. The system of rating varies but in general the highest rating is given when the financial ability of the seller is very strong and the chance of defaults is negligible.

Sellers who do have a very sound financial status tend to issue instruments that offer higher returns. This is done to compensate for the fact that there may be defaults based on the prevailing financial conditions. These instruments are called speculative or high yield. And in terms of the ratings they have been given are placed in the junk status.


krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

I am not sure if the term 'junk status' is a standard term used in business with a clearly defined meaning. However, I have come across this term to describe the market rating or value of bonds, stocks and other type of securities by rating agencies, analysts, and other persons in the trade to describe their market value and future prospect of return. This term is used in this sense which are worth zero or near zero value, either because the assets represents by them have very low value, or because very high risk is associated with the possibilities of the securities being redeemed by the companies issuing these bonds.

For example Oxford Dictionary of Business describes junk bonds as:

Bonds issued on very doubtful security. The finances of the firm issuing them are regarded as so insecure that there is serious doubt as to whether the interest and redemption payments promised will actually be made.

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