A junk bond, also known as a high-yield bond, is a debt security issued by a company or entity with a lower credit rating than investment-grade bonds. These bonds carry a higher risk of default or failure to meet interest or principal payments compared to bonds with higher credit ratings. The lower credit rating reflects the issuer’s financial condition or a perceived higher level of risk associated with the bond. Investors who purchase junk bonds typically demand higher interest rates to compensate for the increased risk. Junk bonds can offer potentially higher returns but also carry a greater level of risk compared to investment-grade bonds.
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