Loan Bond
How do you take out a loan using junk bonds?
How do you take out a loan using junk bonds? What is the process? What are the pros vs. cons? Can you start a new company using the money from junk bonds, or do you typically buy an existing company?
You don’t take out a loan using junk bonds – the bonds are the loan. Basically, you need an existing company. That company would then file a bond offering and have their bonds rated by one of the rating agencies (S&P, Moody’s). If the rating fell below a certain level, they would be considered “junk” bonds. One reason they would fall below the cutoff would be because of the precarious financial situation of the issuing firm. If they were considered junk bonds, the issuer would basically have to establish a high enough interest rate in order to entice investors to buy the bonds.
Usually, a firm does not intentionally issue junk bonds – the bonds become junk as the company’s financial situation worsens and the rating agencies downgrade the bonds.
There are no pros to junk bonds (unless you are an investor with a lot of extra cash) due to the high risk nature. For a firm, the con is that the interest rates payable are higher, which means added/above average expenses.
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