Junk bonds or High Yield Bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments. A bond is a debt or promises to pay investors interest payments and the return of invested principal in exchange for buying the bond. Junk bonds represent bonds issued by companies that are struggling financially and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors.
Companies that issue junk bonds are typically start-ups or companies that are struggling financially. Junk bonds carry risk since investors are unsure whether they’ll be repaid their principal and earn regular interest payments. As a result, junk bonds pay a higher yield than their safer counterparts to help compensate investors for the added level of risk. Companies are willing to pay the high yield because they need to attract investors to fund their operations.
Rating of the bonds by Standard and Poor’s include- AAA (excellent), AA (very good), A (good), BBB (adequate), BB and B (junk), CCC (currently vulnerable to non payment), CC (highly vulnerable to non payment), D (in Default)
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