“Junk Bonds” refer to bonds that carry a credit of “below investment grade.” Bond rating agencies, such as Standard & Poors, Fitch and Moody’s are paid by the bond issuer to provide a credit rating. The credit rating is a direct indication of the bond issuer’s ability to pay interest during the life of an investment and return principal to the investor at maturity. Based on the Standard & Poors rating scale, AAA is the highest credit rating and is reserved for bond issuers that have the lowest risk of default. BBB- is the lowest credit rating a bond issuer can have and still be considered “investment grade.”
There are several factors that are considered by ratings agencies before a rating is assigned or adjusted. Some of the factors include the bond issuer’s economic health and stability, overall market conditions, and geographic/political considerations that may impact the bond issuer’s economic health going forward.
Each time a credit rating is lowered, the ratings agencies are informing the investing public that the bond issuer has a higher likelihood of default, which could result in a loss of principal and income for investors owning those bonds.
Many brokerage firms and financial advisors tout high yield or junk bonds to their clients for the purpose of generating higher levels of income. However, these same brokerage firms and financial advisors fail to adequately disclose the risks of owning junk bonds or monitor changes in the credit profile of the bond issuer after an investment is made. These misrepresentations and omissions preclude an investor from knowing all reasonable facts necessary to make an educated investment decision and may be a basis for a cause of action.
The Wolper Law Firm has extensive experience handling claims involving high yield or junk bonds. If you believe that you were improperly sold high yield or junk bonds or have experienced unexpected losses in these investments, please contact the Wolper Law Firm for a free consultation and case evaluation.