The term “junk bonds,” which is associated with and was possibly created by the 1980s investment banker Michael Milken, is an umbrella category applied to several different types of bonds. While they have some commonalities, each of them has both positive and negative aspects that vary with their individual characteristics.
One common positive characteristic of “junk bonds” is that they began as investment-grade bonds. Second, Milken and others turned an associated negative factor, that their credit rating was lowered, into a positive. Because the bonds’s value decreased, their prices likewise decreased. This was positive because they were bargains for the investor. A third positive feature, from the middle-person’s perspective, was that large numbers of such bonds could be bundled so that individual investors need not make multiple, individual investment decisions.
Milken and others who promoted such sales strongly emphasized the potential high rewards, while acknowledging but not always emphasizing the related high risk. Factor four would be those high rewards, which attracted millions of people to invest. A fifth positive relates to the types of investors. Not only individuals invested in these bonds. This investment pattern among private equity funds and venture capitalists brought large amounts of money into the bond market. Six, the bonds’s attraction for such investors depended on the perceived advantage that the bonds were comparatively unregulated.