Junk Bond (High-Yield Bond)
What Is a Junk Bond (High-Yield Bond)?
A junk bond, also known as a high-yield bond, is a bond issued by a company or entity with a lower credit rating, indicating a higher risk that the issuer could default on payments. Because of this risk, junk bonds offer higher interest rates than investment-grade bonds.
These bonds are commonly issued by companies with weaker financial profiles or higher debt levels.
Why It Matters
Junk bonds offer investors the potential for higher returns, but they also carry greater risk. Investors must carefully evaluate whether the additional yield justifies the possibility of default.
High-yield bonds are often included in diversified investment portfolios to boost income.
How Junk Bonds Work
Credit rating agencies assign ratings to bonds based on the issuer’s financial strength.
Junk bonds typically fall below investment-grade ratings, such as:
- BB+ or lower (Standard & Poor’s)
- Ba1 or lower (Moody’s)
Because these bonds are considered riskier, issuers must offer higher yields to attract investors.
Junk Bond vs Investment Grade Bond
- Junk bonds carry higher credit risk but offer higher yields.
- Investment-grade bonds have stronger credit ratings and lower risk.
FAQs About Junk Bonds
Why are junk bonds called high-yield bonds?
Because they typically pay higher interest rates.
Are junk bonds always risky investments?
They carry higher risk but can offer higher returns.
Who invests in junk bonds?
Institutional investors and diversified income investors often buy them.
Related Terms
