What it is:
How it works (Example):
For example, let's say Company XYZ is a small video gaming company. Company XYZ is profitable, but it needs $10 million right now so it can hire new programmers to expand its line of video games. XYZ decides to borrow the $10 million in the.
Why it Matters:
Junk bonds are typically divided into two categories: Rising stars and fallen angels.
A fallen angel is a bond that once had a high rating but has since been downgraded to junk status (for example, General Motors when it declared bankruptcy). A rising star is a bond that has potential to be upgraded once the company establishes an outstanding track record of paying back its debt.
All things being equal, a investor would rather invest in a rising star's junk bond instead of a fallen angel's junk bond. A rising star has promising underlying financial performance and just needs some time to establish its credit history. A fallen angel once had an investment-grade credit rating, but has experienced some kind of financial degradation requiring a downgrade to "junk." In short, a rising star is on the way up, and a fallen angel is on the way down.