What Are Junk Bonds?


Quick Answer

Junk bonds are bondsthat are high-yield or non-investment grade. Typically, junk bonds have a higher default risk than investment-grade bonds. Junk bonds are considered to be relatively risky investments when compared to safer bonds, but the appeal of higher yields keeps the junk bond market active.

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Full Answer

A bond is an IOU that states the amount of the loan, the date repayment is due, and the interest rate on the loan, which is basically the yield on the bond. Junk bonds have higher yields because the companies that issue these bonds have lower credit ratings, such as "BB" or lower, so it's less likely that the loan will be paid back. Because of the greater risk in loaning money via bonds to companies with lower credit ratings, investors demand greater returns on their loans.

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