Junk bonds, also known as high-yield corporate bonds, are similar to investment-grade bonds, except for the fact that the issuers have poor credit ratings, which do not allow them to issue investment-grade bonds.
These junk bonds grew to prominence in the 1980s and contributed to a number of negative aspects related to them.
First, as a result of low credit ratings, these companies were much more likely to default on these bonds, leaving investors with nothing.
Second, these types of bonds came into prominence due to a phenomenon called fallen-angel companies. These were companies which were previously in good credit standing but had recently dropped to be in poor standing.
Investors were familiar with the fallen-angel companies, but not necessary with their new credit status, which added to the confusion surrounding the junk bonds.
At the same time, investors on Wall Street were experiencing a boom, and many smaller investors wanted to follow in their footsteps. Junk bonds made it easy for fast-talking financial advisors to push junk bonds without their clients knowing the full risk involved.
This practice led to the savings and loan crisis in the 1980s.
In the 1980s junk bonds began being used as a method for leveraged buyouts, which led to an evolution in how a company could refinance. This refinancing evolution would come back into play later with the dot-com bubble.