A junk bond is a high-risk bond issued by a company with a lower credit rating, offering higher interest payments to compensate investors for the increased risk of default.
In Depth
Junk bonds, also known as high-yield bonds, are debt instruments issued by companies or governments that have a lower credit rating from agencies like Standard & Poor's or Moody's. Because the risk of default (not paying back the loan) is higher, these bonds offer a higher interest rate to attract investors. While they offer the potential for greater returns, they also carry a significantly higher risk of losing your initial investment compared to investment-grade bonds.
Example
An investor looking for higher returns might consider buying a junk bond from a growing startup, despite the increased risk of the company failing.