More Signs of the Times

Junk bonds have become a pressing problem, and are similar to the financial mistakes made by bankers prior to the last great depression. To be exact, a junk bond is not a bond that is junk, as the name might suggest. A junk bond is the same thing as a regular bond. It is an IOU written by a corporation to another entity (be it another person or another corporation) which simply states that the corporation owes a set amount of money to the recipient of the bond. It has its own principal, maturity date and interest which will be paid back to you.

So, what's the worry? Junk Bonds May Repeat Crash of 2002 on LBO Credits

The following will give you a better idea as to why:

The last time junk bonds tumbled was in 2002, when companies defaulted on $166 billion of their securities, according to Moody's Investors Service. Merrill Lynch & Co.'s High Yield Master II Index fell about 2 percent that year as yields on the securities rose to a record 11.2 percentage points over Treasuries. Speculative grade, or junk, bonds are rated below Baa3 by Moody's and BBB- by Standard & Poor's.

Severe Downside

``The downside is likely to be very severe,'' Fridson, who led Merrill's high-yield strategy group until he left in 2003 to start his own firm, said in an interview from his office in New York.

Fridson predicts that in the next few years the default rate may reach or surpass the 2002 level, when WorldCom Inc. in Jackson, Mississippi, and Adelphia Communications Corp., then based in Coudersport, Pennsylvania, filed for bankruptcy.