Written by What Are Junk Bonds?
- Definition: Junk bonds, also known as high-yield bonds, are debt securities issued by companies with lower credit ratings. They offer higher interest rates due to their increased risk of default.
- Credit Ratings: Junk bonds are rated below investment grade by rating agencies like Moody’s and S&P. These bonds are typically rated BB or lower.
- Why They Are Risky: Due to the lower credit ratings, junk bonds come with a higher risk of default compared to investment-grade bonds.
Why Invest in Junk Bonds?
- High Returns: Junk bonds offer higher yields than investment-grade bonds, which can be appealing to investors looking for more substantial returns.
- Diversification: Including junk bonds in a portfolio can provide diversification by offering exposure to different risk profiles and sectors.
- Economic Recovery Potential: During periods of economic recovery, the value of junk bonds can increase as companies’ financial stability improves.
Risks of Investing in Junk Bonds
- Credit Risk: Junk bonds carry a higher risk of default, meaning the issuer may be unable to meet its debt obligations.
- Price Volatility: These bonds can be more volatile than safer investments, meaning their prices can fluctuate significantly based on economic conditions.
- Interest Rate Risk: As with all bonds, junk bonds are sensitive to interest rate changes. When rates rise, the prices of junk bonds tend to fall.
*Disclaimer: The content in this post is for informational purposes only. The views expressed are those of the author and may not reflect those of any affiliated organizations. No guarantees are made regarding the accuracy or reliability of the information. Use at your own risk.