(MoneyHippo.com) – Junk bonds, also known as high-yield bonds, are corporate bonds that are rated below investment grade by credit rating agencies. This means that they are considered to have a higher risk of default than investment-grade bonds, which are rated as safer investments.
Junk bonds are issued by companies with lower credit ratings or higher levels of debt, which makes them riskier for investors. To compensate for this higher risk, junk bonds typically offer higher interest rates than investment-grade bonds. The higher yield can be attractive to investors who are willing to take on more risk in order to earn higher returns.
Junk bonds can be an important source of financing for companies that may not be able to secure funding through traditional bank loans or other types of financing. However, they also come with higher risk, as companies with lower credit ratings are more likely to default on their debt.
Junk bonds are typically sold to institutional investors, such as mutual funds, hedge funds, and pension funds. However, individual investors can also invest in junk bonds through bond funds or exchange-traded funds (ETFs) that specialize in high-yield bonds.
Overall, junk bonds are a type of corporate bond that is considered to be a higher-risk investment than investment-grade bonds. They can offer higher yields, but also come with higher risk of default. As with any investment, it’s important to carefully consider the risks and potential returns before investing in junk bonds and consulting with a financial advisor.
Copyright 2023, MoneyHippo.com