“Junk bond” is the informal name for a high-yield bond — corporate debt that pays more because the borrower is rated below investment grade. Here is what that rating means, why the yield is higher, and how these bonds differ from a private note.
Credit agencies (Moody’s, S&P, Fitch) grade a company’s ability to repay its debt. Bonds graded BBB-/Baa3 and above are “investment grade.” Anything BB+/Ba1 and below is “high-yield,” or colloquially “junk.” The label is about credit quality, not whether the bond is a bad investment — plenty of large, well-known companies issue high-yield debt.
A lower-rated borrower is statistically more likely to miss payments or default, so investors demand a higher coupon to compensate. That extra yield is the price of that risk. When the economy weakens, junk-bond defaults tend to rise and their prices tend to fall — often at the same time investors most want safety.
People sometimes lump these together because both are “high-yield.” They are not the same. A junk bond is rated, usually registered or issued under established rules, and typically traded on a secondary market. A private promissory note is usually unrated, unregistered, and illiquid — you rely entirely on one issuer’s disclosures and its ability to pay, with no rating and no market price.
To be direct about our own product: Oaktower Capital issues private promissory notes, not junk bonds. Our notes carry none of the ratings, secondary-market liquidity, or registered-offering disclosures a junk bond has, and their coupon depends on a high-risk options strategy that can lose money. That makes them, if anything, higher-risk than a diversified junk-bond fund. Read the risk disclosures first.