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Financial Terms and Glossary

Junk bond

Junk Bond

A junk bond is a high-yield, high-risk bond issued by companies with lower credit ratings (below investment grade) from credit rating agencies like Moody’s or S&P.

Example

A company with a credit rating of BB issues junk bonds with a 10% interest rate, attracting investors willing to take on higher risk for the possibility of higher returns.

Key points

• High-yield, high-risk bonds issued by companies with lower credit ratings.

• Offer higher interest rates due to the increased risk of default.

• Commonly used by companies seeking to raise capital despite lower creditworthiness.

Quick Answers to Curious Questions

What is the primary risk associated with junk bonds?

The primary risk is the potential for default, as junk bonds are issued by companies with lower credit ratings and financial stability.

Why do investors buy junk bonds despite the higher risk?

Investors are attracted to the higher interest rates and potential for greater returns compared to investment-grade bonds.

How do credit rating agencies classify junk bonds?

Junk bonds are classified as below investment grade, typically rated BB or lower by agencies like Moody’s or S&P.

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