A “junk bond” is a slang term for a high-risk, below-investment-grade bond with a higher yield than bonds with higher ratings. Also known as “speculative-grade” or “non-investment-grade” bonds, these bonds are those rated from BB+ through CAA-, according to the S&P Global ratings.
Their higher yields means these bonds offer a much higher return to investors. However, there is a much higher risk of default associated with these bonds compared to other investment grade bonds.
What Are the Risks?
The large returns associated with junk bonds come with a lot of risk. Since these companies are already considered higher risk investments, any additional risk factors can easily affect the bond price. This can lead to greater potential losses for investors.
The credit ratings of junk bonds can also quickly deteriorate, making an already risky investment even more uncertain. If the company issuing the junk bonds mismanages the finances or experiences bad publicity, they could quickly become a much more risky investment.
Should You Invest in Junk Bonds?
Investing in junk bonds is definitely a riskier bet compared to other types of investments. That being said, they may still be a viable option for investors who are looking to diversify their portfolio and have a higher tolerance for risk. In addition, knowing the risks of investing in junk bonds can help you make better-informed decisions.