Asset Pricing

JUNK BOND

JUNK BOND

  • Bonds issued by the corporation with low credit ratings , which means high risk, high return.
  • The JUNK rating means that the timely repayment ability can be greatly influenced by external or internal changes. The rating implies speculative element at this stage.
  • Local Credit rating agency has ratings between AAA~D (20levels)
    • Investment grade : AAA~BBB- ratings
    • JUNK grade: below BB+ rating

Pricing Method

  • The pricing of Junk Bond which has speculative elements is based on additional risk compared to the investment grade.
  • Refer to the allowance for bad debt based on asset quality classification of FSS.
  • Junk Spread and cash flow depreciation rates for each grade were calculated, than priced by zero pricing and YTM  method
FSS Forward Looking Criteria and credit rating
inform of Rating, Category, Allowance for bad debts required, 내용
Rating Category Allowance for bad debts required 내용
Investment grade(AAA~BBB-) Normal Above 0.85% Industrial risk, risk, business risk, and financial risk are generally low or moderate identities, capacity for timely payment is strong.
BB+~BB- precautionary Above 7% Potential insolvent risk , If management does not take any further remedial action
B+~B- substandard 20% There are clear risks that threaten the repayment of the debt, and if such a defect is not remedied
CCC~C Doubtful Above 50% Capacity for timely payment is doubtful or difficult
D estimated loss Above 100% Immediate default or in default as of present time