What is a Junk Bond?
What is a Junk Bond?
A junk bond is a type of bond that is rated lower by credit rating agencies because it's seen as more risky compared to other bonds. It's called "junk" not because it's worthless, but because there's a higher chance the company or government issuing the bond might not be able to pay back the money. To make up for this risk, junk bonds pay higher interest rates. This means if you invest in a junk bond, you could earn more money compared to safer bonds, as long as the issuer doesn't fail to pay. [1]
3 things to know about Junk Bonds
- Despite their risk, junk bonds can be an attractive investment option because of the high returns they offer. Investors willing to take on more risk might find junk bonds appealing because they can significantly boost the income from their investment portfolios.
- Junk bonds are often issued by companies that are either struggling financially or are relatively new and haven’t established a strong financial track record yet. This makes them more susceptible to economic downturns.
- An interesting fact about junk bonds is that they have a more volatile market. Their prices can fluctuate more compared to higher-rated bonds, especially during times of economic uncertainty. However, this volatility can also present buying opportunities for savvy investors looking for potential bargains.
Sources
[1] https://www.investor.gov/introduction-investing/investing-basics/glossary/high-yield-bond-or-junk-bond
Disclaimer: Yendo is not a provider of financial advice. The material presented on this page constitutes general consumer information and should not be regarded as legal, financial, or regulatory guidance. While this content may contain references to third-party resources or materials, Yendo does not guarantee the accuracy or endorse these external sources.